IMF Country Report No.

22/292

ZAMBIA
REQUEST FOR AN ARRANGEMENT UNDER THE
September 2022 EXTENDED CREDIT FACILITY—PRESS RELEASE; STAFF
REPORT; STAFF SUPPLEMENT; STAFF STATEMENT;
AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR
ZAMBIA
In the context of the Request for an Arrangement Under the Extended Credit Facility, the
following documents have been released and are included in this package:

• A Press Release including a statement by the Chair of the Executive Board.

• The Staff Report prepared by a staff team of the IMF for the Executive Board’s
consideration on August 31, 2022, following discussions that ended on June 15, 2022,
with the officials of Zambia on economic developments and policies underpinning the
IMF arrangement under the Extended Credit Facility. Based on information available at
the time of these discussions, the staff report was completed on August 9, 2022.

• A Debt Sustainability Analysis prepared by the staffs of the IMF and the
International Development Association.

• A Staff Statement updating information on recent developments.

• A Statement by the Executive Director for Zambia.

The IMF’s transparency policy allows for the deletion of market-sensitive information and
premature disclosure of the authorities’ policy intentions in published staff reports and
other documents.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090
Telephone: (202) 623-7430 • Fax: (202) 623-7201
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Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2022 International Monetary Fund

 PR22/297

IMF Executive Board Approves New Extended Credit Facility

(ECF) Arrangement for Zambia
FOR IMMEDIATE RELEASE

• The IMF Board approves SDR 978.2 million (about US$1.3 billion) 38-month ECF
arrangement f or Zambia to help restore macroeconomic stability and foster higher, more
resilient, and more inclusive growth.

• The authorities’ program, supported by the ECF-arrangement, will advance the authorities’
homegrown reform plan to restore debt sustainability, create fiscal space for much-needed
social spending, and strengthen economic governance.

• Securing timely restructuring agreements with external creditors will be essential for the
successful implementation of the new ECF arrangement.

Washington, DC – August 31, 2022: The Executive Board of the International Monetary
Fund (IMF) approved a 38-month arrangement under the Extended Credit Facility (ECF) in an
amount equivalent to SDR 978.2 million (around US$1.3 billion, or 100 percent of quota). The
program is based on the authorities’ homegrown economic reform plan that aims to restore
macroeconomic stability and foster higher, more resilient, and more inclusive growth.

Zambia is dealing with the legacy of years of economic mismanagement, with an especially
inef f icient public investment drive. Growth has been too low to reduce rates of poverty,
inequality, and malnutrition that are amongst the highest in the world. Zambia is in debt
distress and needs a deep and comprehensive debt treatment to place public debt on a
sustainable path.

The ECF-supported program will help reestablish sustainability through fiscal adjustment and
debt restructuring, create fiscal space for social spending to cushion the burden of adjustment,
and strengthen economic governance, including by improving public financial management.
The program will also catalyze much needed financial support from development partners.
The Executive Board’s decision will enable an immediate disbursement equivalent to
SDR 139.88 million (about US$185 million).
Following the Executive Board discussion on Zambia, Ms. Kristalina Georgieva, Managing
Director, issued the following statement:

“Zambia continues to face profound challenges reflected in high poverty levels and low
growth. The ECF-supported program aims to restore macroeconomic stability and foster
higher, more resilient, and more inclusive growth.

“Restoring fiscal sustainability will require a sustained fiscal adjustment. The authorities’
adjustment plans appropriately focus on eliminating regressive fuel subsidies, enhancing the
ef f iciency of the agricultural subsidy program, and reducing inefficient public investment.
Domestic revenue mobilization also needs to support the medium-term adjustment. The
adjustment creates fiscal space for increased social spending to cushion the burden on the
most vulnerable, help reduce poverty, and to invest in Zambia’s people. The ongoing
 2

expansion of the authorities’ Social Cash Transfer program and their plans to increase public
spending on health and education are particularly welcome. Together with the fiscal
adjustment, Zambia needs a deep and comprehensive debt treatment under the G20
Common Framework to restore debt sustainability.

“A substantial strengthening of fiscal controls is needed to support the fiscal adjustment, as

well as address governance and corruption vulnerabilities. Public investment management
and procurement practices need to be strengthened to ensure transparency and the efficient
use of scarce resources. It will also be important to bolster the framework for monitoring fiscal
risks, particularly those related to large state-owned enterprises.

“The Bank of Zambia should continue its efforts to reduce inflation and preserve financial
stability. International reserves should be replenished as conditions allow and the exchange
rate should continue to ref lect market conditions. Addressing high NPL levels and ensuring
adequate capital buffers will also be important.”
 3

Table 1. Zambia: Selected Economic Indicators, 2018–25

 ZAMBIA
REQUEST FOR AN ARRANGEMENT UNDER THE EXTENDED
August 9, 2022 CREDIT FACILITY

EXECUTIVE SUMMARY
Context. Zambia is dealing with large fiscal and external imbalances resulting from
years of economic mismanagement, especially an overly ambitious public investment
drive that did not yield any significant boost to growth or revenues. A drought in 2019
and the COVID-19 pandemic exacerbated the acute economic and social challenges
facing the country, with poverty, inequality, and malnutrition rates amongst the highest
in the world. As a result, Zambia is in debt distress, defaulting on its Eurobonds in
November 2020 while also accumulating arrears to other creditors. The war in Ukraine
has increased prices of fuel and fertilizer, amplifying pressures further.

Extended Credit Facility Arrangement (ECF). The authorities have requested a 38-
month arrangement under the ECF in the amount of SDR 978.2 million (100 percent
of Zambia’s quota).

Outlook and risks. With a resolution to the debt crisis, economic recovery is
anticipated to continue in 2022 and inflation should continue falling. Key risks to the
outlook include volatility in copper prices and production, climate shocks, spillovers
from the war in Ukraine, and reform fatigue, especially in the face of a large fiscal
adjustment.

Program objectives and policies. The proposed ECF-supported program aims to

restore macroeconomic stability and foster higher, more resilient, and more inclusive
growth. The program reflects the goals of the authorities’ Eighth National Development
Plan and is tailored to addressing Zambia’s most pressing macroeconomic challenges,
namely (i) restoring sustainability through fiscal adjustment and debt restructuring;
(ii) creating fiscal space for social spending to cushion the burden of adjustment; and
(iii) strengthening governance and reducing corruption vulnerabilities, including by
improving public financial management. The program will seek to ensure that monetary
and exchange rate policies support the restoration of macroeconomic stability,
international reserves return to adequate levels, and the financial sector remains stable.
ZAMBIA

Approved By Discussions took place over 18 months, including during virtual

Costas Christou (AFR) missions in February-March 2021, April-May 2021, and November-
and Martin Cerisola December 2021. A staff level agreement was announced on
(SPR) December 3, 2021, with the underpinning macroeconomic
framework updated during a June 2022 virtual staff visit. The staff
team was led by Mr. Robinson (until June 2021) and Ms. Holland
(afterwards), and consisted of Ms. Sharma (Resident Representative),
Messrs. Gupta, Mbaye, Meleshchuk, and Slavov (all AFR), Mdmes.
Balta and Singh (SPR), Mr. Saab (MCM), Mr. Feher, Ms. Stone, and
Ms. Tchelishvili (all FAD). Mr. Mungala and Mr. Mwansa (local office)
assisted the team. Ms. Mannathoko (Executive Director), Mr.
Damane, and Ms. Maidi (all OED) participated in most discussions.
Ms. Bravo, Mr. Guzman, and Ms. Kumar (all AFR) assisted from
headquarters. Staff met finance ministers Ng'andu and
Musokotwane, Bank of Zambia governors Mvunga and Kalyalya, and
many other senior government officials.

CONTENTS
CONTEXT __________________________________________________________________________________________________ 4

RECENT DEVELOPMENTS _______________________________________________________________________________ 5

OUTLOOK AND RISKS ___________________________________________________________________________________ 9

PROGRAM OBJECTIVES AND POLICIES ______________________________________________________________10

A. Restoring Medium-Term Fiscal Sustainability _______________________________________________________ 10
B. Enhanced Social Spending ____________________________________________________________________________ 13
C. Restoring Debt Sustainability and Improving Debt Management and Transparency ___________ 14
D. Strengthening Governance ___________________________________________________________________________ 16
E. Strengthening Monetary Policy and Re-Building External Resilience _____________________________ 17
F. Safeguarding Financial Stability ______________________________________________________________________ 18
G. Improving Statistical Capacity ________________________________________________________________________ 19

PROGRAM MODALITIES AND OTHER ISSUES ______________________________________________________19

STAFF APPRAISAL_______________________________________________________________________________________23

BOXES
1. The COVID-19 Pandemic_______________________________________________________________________________ 6
2. Electricity Sector Reforms _____________________________________________________________________________ 17

2 INTERNATIONAL MONETARY FUND

 ZAMBIA

FIGURES
1. Recent Developments, 2000–22 ______________________________________________________________________ 26
2. External Sector, 2013–22 ______________________________________________________________________________ 27
3. Fiscal Developments, 2016–21________________________________________________________________________ 28
4. Monetary & Financial Developments ________________________________________________________________ 29
5. Capacity to Repay Indicators Compared to UCT Arrangements for PRGT Countries ____________ 31

TABLES
1. Selected Economic Indicators, 2018–25 _____________________________________________________________ 32
2a. Zambia: Balance of Payments, 2018–25 (Millions of U.S. dollars) ________________________________ 33
2b. Balance of Payments, 2018–25 (Percent of GDP) __________________________________________________ 34
3a. Fiscal Operations of the Budgetary Central Government, 2018–25 (Millions of Kwacha) ______ 35
3b. Fiscal Operations of the Budgetary Central Government, 2018–25 (Percent of GDP) __________ 36
4. Monetary Accounts, 2018–25_________________________________________________________________________ 37
5. Financial Soundness Indicators, 2013–22____________________________________________________________ 38
6. External Financing Needs and Sources, 2018–25 ___________________________________________________ 39
7. Schedule of Reviews and Disbursements ____________________________________________________________ 40
8. Indicators of Capacity to Repay the Fund, 2022–32 ________________________________________________ 41

ANNEXES
I. Risk Assessment Matrix ________________________________________________________________________________ 42
II. External Sector Assessment ___________________________________________________________________________ 44

APPENDIX
I. Letter of Intent __________________________________________________________________________________________ 48
Attachment I. Memorandum of Economic and Financial Policies, 2022–25 ___________________ 51
Attachment II. Technical Memorandum of Understanding _____________________________________ 87

INTERNATIONAL MONETARY FUND 3

ZAMBIA

CONTEXT
1. Years of fiscal profligacy led to Zambia accumulating large fiscal and external
imbalances. Consistently high fiscal deficits were driven by high spending on wages, subsidies,
and inefficient public investment that failed to deliver growth dividends. The accumulation of non-
concessional external debt to finance this spending led to a ballooning debt burden, with the
associated debt-servicing costs gradually crowding-out social protection and investment in human
capital. Spending routinely overshot budget allocations reflecting weak spending controls.

2. The growing debt burden left Zambia vulnerable, with the COVID-19 shock pushing
the country into debt distress. Vulnerabilities were aggravated by a succession of shocks: a drop in
copper prices in 2015-16 (text chart), droughts (most recently in 2019), and the COVID-19 pandemic.
While policy adjustment mitigated earlier shocks, Copper Prices, January 2014–June 2022
policy resolve waned as the country entered the ($ per metric ton)
2021 election cycle. As the COVID-19 shock
12,000
unfolded, financing pressures emerged, the kwacha
depreciated, and inflation spiked, increasing the 10,000

external debt burden. Unencumbered reserves 8,000

shrank to about $970 million by end-October 2020

6,000
(about 2.4 months of imports), against contracted
public sector FX-denominated 2021 debt service of 4,000

around $1.4 billion and signs of significant unmet 2,000

FX demand. As public debt ballooned, the
government defaulted on its Eurobonds in
0
Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21 Jan-22

November 2020 and stopped servicing most Source: Bloomberg

external debt. 1

3. President Hichilema won a landslide victory in August 2021 with a mandate to turn the
economy around. The new administration has already taken decisive steps to reduce the deficit—
including removing explicit subsidies on fuel—supported by measures to strengthen spending
controls. Markets reacted positively—domestic bond yields dropped markedly, the kwacha
appreciated, and the backlog of FX demand cleared. This, combined with higher copper prices and
the 2021 general Special Drawing Rights (SDR) allocation, have contributed to an improved outlook
for the economy.

4. Despite this more positive outlook, Zambia still faces deep-rooted imbalances.
Chief among Zambia’s current challenges are (i) restoring fiscal sustainability, including by
addressing the unsustainable debt burden; (ii) rebuilding external buffers to enhance resilience;

1The authorities remain current on obligations to the AfDB and World Bank, as well as a few still-disbursing loans for
priority projects.

4 INTERNATIONAL MONETARY FUND

 ZAMBIA

and (iii) reducing Zambia’s high levels of inequality and poverty, 2 while addressing the country’s
growing social needs, particularly in rural areas.

RECENT DEVELOPMENTS
5. Economic activity is rebounding from a deep contraction in 2020 (Figure 1 and Table 1).
The economy shrank by 2.8 percent, with services, transport, manufacturing, and tourism taking the
brunt of the COVID-19 shock (Box 1). A moderate recovery started in 2021, with growth estimated
at 3.6 percent, though with some key sectors still held back by supply chain disruptions (mining) or
weather (agriculture). This recovery is continuing into 2022—real GDP expanded by 2.4 percent in
2022Q1, mostly driven by public sector and education. Inflation has receded from its peak of almost
25 percent in mid-2021 to 9.7 percent in June 2022, in line with the appreciating kwacha (text chart).
However, it may accelerate in the second half of 2022, including due to the impact on fuel and
fertilizer prices of the war in Ukraine.

6. Market sentiment has markedly improved but

remains fragile. Financing conditions worsened in 2020 as Zambian Kwacha per USD
external financing dried up. Consequently, the government
increasingly relied on more expensive domestic debt, including
23

private placements, to finance its budget, while also

21

accumulating large budgetary arrears. The situation has

19

improved since mid-2021—domestic bond yields are 400- 17

1200 basis points lower across the curve and the kwacha has 15

appreciated by 33 percent in the twelve months to end-June 13

Sep-20

Sep-21
Jan-20

Jul-20

Jan-21

Jul-21

Jan-22
Mar-20

Mar-21

Mar-22
May-20

Nov-20

May-21

Nov-21

May-22
2022 (text chart).
Source: Bloomberg
7. Gross international reserves have increased from a
low base (Figure 2 and Tables 2a-2b). The $1.3 billion SDR allocation, together with higher FX
inflows, have brought reserves to $2.9 billion or 3.1 months of prospective 2023 imports at end-
March 2022—against an estimated optimal level of 5 months (see ¶37 below). The current account
surplus shrank from 12 percent of GDP in 2020 to 7.6 percent in 2021, as the 2020 COVID-19 related
import compression reversed, more than offsetting the impact of higher copper prices on exports.

2Macro Poverty Outlook, Spring Meetings 2022: Country-by-country Analysis and Projections for the Developing World,
The World Bank, 2022. The latest available Gini coefficient estimate of 0.57 from 2015 places Zambia as one of the
most unequal countries in the world. The poverty rate increased from 58.7 percent in 2015 to 60.1 percent in 2020,
and is estimated at 59.9 percent in 2021.

INTERNATIONAL MONETARY FUND 5

ZAMBIA

Box 1. Zambia: The COVID-19 Pandemic

The first cases of COVID-19 in Zambia were reported on March 18, 2020. Since then, the country has
experienced several waves with a significant impact on health outcomes and economic activity. The third
wave, driven by the Delta variant, occurred between June and December 2021, and led to the highest number
of infections and deaths. Following the fourth (Omicron) wave, which started in December 2021, the number
of infections has dropped and remains relatively low. The government took action to limit the spread of
COVID-19 through the introduction of social distancing measures. The stringency of these measures peaked
in May 2020, similar to the rest of the world.
The government is targeting at least 70 percent of the eligible population (adults over 18) to be vaccinated.
As of end-June 2022, the vaccination rate stood at 41 percent of the eligible population or 25 percent of the
total population. While access to vaccines was initially limited due to global shortages, the government was
able to secure doses through COVAX and bilateral partners, and availability is now sufficient. To help address
vaccine hesitancy, the government has carried out a number of communication campaigns—these have
helped to increase the vaccination rate. Nevertheless, with overall vaccination rates still quite low, a more
severe outbreak remains a significant risk.
New Deaths Per Million, Smoothed Percent of Total Population that Received at Least
One Vaccine Dose, Smoothed

Sources: Our World in Data and IMF staff calculations.

8. The fiscal position deteriorated further in 2020-21 (Figure 3 and Tables 3a-3b). The fiscal
deficit on a commitment basis increased from 13.9 percent of GDP in 2019 to 17.4 percent in 2020
and remained high at 14.5 percent in 2021. This was despite a relatively strong revenue performance
due to: (i) large one-off dividends from the Bank of Zambia (BoZ) in 2020 and 2021; 3 (ii) a recovery

3
In part reflecting large realized gains on foreign currency assets given the kwacha depreciation.

6 INTERNATIONAL MONETARY FUND

 ZAMBIA

in domestic consumption taxes in 2021; and (iii) the impact of surging copper prices in 2021 on
mining sector taxes, including the payment of previously deferred taxes as companies’ liquidity
situation improved.

9. Domestic debt financed a sharp increase in spending, including to mitigate the impact
of the COVID-19 pandemic and in the run-up to the August 2021 presidential election.
Spending on agricultural subsidies (fertilizer and seeds) increased from 1.9 percent of GDP in 2019
to 3.0 percent in 2020 and 2.4 percent in 2021, while grain purchases for the Strategic Food Reserve
also jumped. Explicit fuel subsidies claimed a combined 3.9 percent of GDP in 2020-21, with fuel
prices frozen at December-2019 levels for two years despite rising oil prices and a depreciating
kwacha. 4 Spending on social protection increased from 0.1 percent of GDP in 2019 to 1.3 percent
in 2021. Spending on goods and services and domestically-financed public investment also
increased, reflecting COVID-19 related health spending and election-related outlays. In addition,
the authorities recapitalized the National Savings and Credit Bank (NATSAVE) in 2020. 5 As Zambia
stopped servicing most external debt in 2020, interest payments on external debt dropped from
3 percent of GDP in 2019 to 0.5 percent in 2021. The effective loss of access to external financing
triggered a sharp slowdown in foreign-financed public investment (from 8.4 percent of GDP in 2019
to 1.9 percent in 2021) and explained the surge in net domestic financing (from 3.4 percent of GDP
in 2019 to 9.3 percent of GDP in 2020 and 7.3 percent of GDP in 2021), with interest on domestic
debt increasing from 3.9 percent of GDP in 2019 to 5.9 percent in 2021.

10. Unmet financing needs resulted in the accumulation of significant budgetary arrears in
2020-21. These included further accumulation of arrears on VAT refunds, bringing the stock to
2.4 percent of GDP at end-2021, and a sharp increase in expenditure arrears (including on fuel),
with the stock reaching 13.4 percent of GDP at end-2021.

11. Fiscal outturns for January-May 2022 show the authorities broadly on track to achieve
the overall balance targeted in Budget 2022 (text table). On revenues, weakness in indirect taxes
has been more than offset by overperformance in income taxes (particularly mining CIT). Overall
fiscal expenditure (cash basis) was in line with the budget, with non-payment of external interest
offsetting overspending on goods and services, and arrears clearance (recorded under “other”
spending). Overall, despite stronger revenues, the primary balance (cash basis) was 0.7 percent
of GDP lower than the budget target, mostly reflecting an excessively ambitious compression of
primary expenditure in the 2022 budget.

12. Zambia’s SDR allocation has supported social spending in 2022. The authorities plan to
use about half of the allocation to support the 2022 budget, with the remaining half divided equally
between 2023 and 2024. So far in 2022, the allocation has supported the clearance of pension

4 In addition to budgetary spending on explicit fuel subsidies, the authorities accumulated a large stock of unpaid
fuel bills of around 2.3 percent of GDP at end-2021.
5 The recapitalization cost amounted to 900 million kwacha (0.3 percent of GDP) and was necessary to bring
NATSAVE up to the minimum capital requirement and facilitate access to the BoZ’s Medium-Term Refinancing
Facility (MTRF). NATSAVE is a government owned non-bank financial institution focused on enhancing access to
finance for households and SMEs.

INTERNATIONAL MONETARY FUND 7

ZAMBIA

arrears, purchases of drugs and medical supplies, the Social Cash Transfer (SCT) program, and the
Food Security Pack program. A Memorandum of Understanding will be established between the
government and the Bank of Zambia to clarify the roles and responsibilities for servicing the
associated financial obligations to the Fund.

Zambia: Year-To-Date Budget Performance

(through May 2022)

Sources: Zambian authorities; and IMF staff estimates and projections.

13. The improved revenue outlook for 2022 is expected to mitigate the emerging
spending pressures due to the impact of the war in Ukraine on fertilizer prices. This will
increase the cost of the agricultural input subsidy program (FISP) substantially relative to the budget.
In addition, technical and political economy challenges will delay the authorities’ objective
of reforming the program. 6

14. Zambia is in debt distress. Over 2014-19, external public and publicly guaranteed (PPG)
debt—comprising a diverse set of creditors (text chart)—more than quadrupled and Zambia’s debt
burden was assessed as unsustainable in the 2019 Article IV Consultation. Reflecting the 2019-
20 financing challenges, Zambia fell into arrears on external debt service and defaulted on its
Eurobonds in 2020. Principal and interest arrears reached $2.2 billion by end-2021, and $2.4 billion
by end-March 2022. By end-2021, external PPG debt, including non-resident holdings of domestic-
currency debt and $1.3 billion of arrears to external suppliers (including ZESCO’s arrears
to independent power producers (IPPs)), reached $20 billion or 78 percent of GDP, with total PPG
debt reaching $33.8 billion or 133 percent of GDP.

6
The goal is to introduce a new Comprehensive Agriculture Support Program (CASP) that will be distributed via
electronic vouchers and will enable farmers to procure a wider range of agricultural inputs. This will help secure
significant savings for the government, compared to the current distribution mechanism. However, at this
conjuncture, the private sector counterparts necessary to support the new delivery mechanism have reportedly been
unwilling to bear the associated financial risks given the surge in global fertilizer prices.

8 INTERNATIONAL MONETARY FUND

 ZAMBIA

Debt Holders Profile of Zambia External PPG Debt, end–2021

(In percent of total external debt)

Composition of Zambia external PPG Debt (end-2021)

IFIs
Non-residents holdings of
11%
domestically issued debt Other multilateral
16% 2%
Paris club, bilateral
Budget (fuel, 2%
contractor) and IPP
arrears Paris club, ECA-
7% backed
4%
SOE non-guaranteed
1%

SOE guaranteed Non-Paris club,

8% bilateral
18%

Other commercial
7%

Non-Paris club, ECA-

Eurobonds backed
17% 7%

Source: Authorities and staff estimates.

15. Regulatory forbearance measures have helped the financial sector weather the impact
of COVID-19 (Figure 4 and Tables 4-5). Average banking sector capitalization and profitability
remain robust at 25 percent of risk-weighted assets and 5.1 percent of total assets, respectively,
at end-March 2022. Profitability has been underpinned by earnings on domestically-issued
government securities, which represent 29 percent of total banking sector assets, though with wide
variations across individual banks. However, COVID-related regulatory forbearance measures
continue to mask possible asset quality and capitalization concerns. Specifically, while reported
gross non-performing loans (NPLs) stood at 6.4 percent of total loans at end-March 2022,
the inclusion of loans restructured during the pandemic (currently not subject to provisioning)
would likely bring that figure above 10 percent. Furthermore, given general weaknesses in the
recognition of NPLs, the underlying level may also be understated, and banks might also be under-
provisioning for credit losses, including to take advantage of pandemic-specific forbearance
measures.

OUTLOOK AND RISKS

16. The restoration of macroeconomic stability under the IMF-supported program,
together with the assumed successful debt restructuring operation, is expected to underpin
a gradual economic recovery. Growth is conservatively projected to reach 3.0 percent in 2022
and to settle around 4½-5 percent over the medium term as confidence strengthens and
investment grows. Inflation is projected to maintain its current downward trend, reflecting base
effects and the continued impact of the stronger kwacha, and should fall within the BoZ’s target
band of 6-8 percent by 2023H1. The current account will remain in surplus, supported by robust
copper exports, although the surplus is projected to shrink in the near term as imports recover,

INTERNATIONAL MONETARY FUND 9

ZAMBIA

before increasing again over the medium term as new investment in the mining sector yields higher
exports.

17. The balance of risks around the baseline is to the downside (Annex I). The outlook
is subject to significant downside risks, including from (i) delays in reaching a final debt restructuring
agreement in line with program parameters; (ii) climate, commodity, and COVID-related shocks that
could complicate macroeconomic management and raise the cost of adjustment; (iii) reform fatigue
due to political and social pressures, particularly in the context of a large fiscal adjustment; and (iv)
refinancing risks for domestic government debt stemming from the exit of non-resident investors.
These risks are mitigated by the authorities’ demonstrated commitment to the program and strong
ownership of policies and reforms. There are also upside risks from a potentially stronger recovery
in economic activity. However, both currency and inflation pressures could reappear (e.g., if capital
inflows reverse) and the authorities should stand ready to tighten monetary policy if these risks
materialize.

18. Spillovers from the war in Ukraine could generate additional challenges. In addition
to the higher fiscal costs of FISP (see ¶13 above), the political costs of the authorities’ fuel subsidy
reform have risen due to the marked increase in fuel prices (by 38-57 percent since December 2021)
reflecting higher global oil prices. 7 While the inflationary impact has been mitigated so far by the
offsetting forces of the kwacha appreciation and a high CPI base, risks remain. Although food
security is relatively protected by Zambia’s self-sufficiency in maize production, these inflationary
risks would be compounded if external demand pressures (or drought conditions) translate into
higher food prices. These political and economic costs are likely to grow over time, highlighting
the importance of the IMF-supported program.

PROGRAM OBJECTIVES AND POLICIES

The ECF-supported program will underpin the authorities’ efforts to restore macroeconomic stability
and foster higher, more resilient, and more inclusive growth. It reflects the goals of the authorities’
Eighth National Development Plan and is tailored toward addressing Zambia’s most pressing
macroeconomic challenges, namely (i) restoring fiscal and debt sustainability through a fiscal
adjustment and debt restructuring; (ii) creating fiscal space for social spending to cushion the burden
of adjustment; and (iii) strengthening governance and reducing corruption vulnerabilities, including
by improving public financial management (PFM). The program will seek to ensure that monetary and
exchange rate policies support the restoration of macroeconomic stability, international reserves return
to adequate levels, and the financial sector remains stable.

A. Restoring Medium-Term Fiscal Sustainability

19. To address fiscal imbalances while creating additional space for social spending, the
ECF-supported program will target a large, front-loaded, and sustained fiscal consolidation

7
Between end-November 2021 and end-June 2022, the price of petrol increased 52 percent, the price of diesel by 57
percent, and the price of kerosene by 38 percent.

10 INTERNATIONAL MONETARY FUND

 ZAMBIA

(MEFP ¶41, text table). The primary balance (commitment basis)—the program’s fiscal anchor—is
targeted to improve from a deficit of 6.0 percent of GDP in 2021 to a surplus of 3.2 percent by 2025,
placing public debt on a declining path. The consolidation is front-loaded through reforming
regressive and wasteful subsidies—removing fuel subsidies in 2022 and reforming agricultural
subsidies starting in 2023—and reducing excessive and poorly targeted public investment.
To enhance budget credibility and support private sector economic activity, the program will also
aim at a net clearance of budgetary arrears on expenditure and VAT refunds (MEFP ¶53-55).
A strategy for clearing budgetary arrears by 2026 was published on August 4, 2022 (prior action). 8
Beyond 2022, domestic revenue mobilization—through both policy and administrative reforms—will
play a relatively bigger role in the consolidation. This targeted adjustment will also provide increased
space to invest in human capital and expand the social safety net. The authorities’ proposed
Medium-Term Budget Framework (MTBF) for 2023-25 is aligned with these program objectives
(prior action).

Zambia: Composition of Recommended Fiscal Adjustment

(Percent of GDP, 2021–25)
Program Period Total (2021-
2021 2022 2023 2024 2025 (2022-25) 25)
Improvement in primary balance (cash basis) 5.7 0.3 1.8 0.7 0.7 3.5 9.2
Improvement in primary balance (commitment basis) 4.1 6.7 1.5 0.5 0.5 9.2 13.3
Improvement in primary balance excluding large one-off revenues (commitment basis) 3.4 8.2 1.5 0.5 0.5 10.7 14.1

Revenue increases (cash basis) 3.0 -2.0 0.9 0.4 0.1 -0.5 2.5
Revenue increases (commitment basis)1 3.0 -1.1 0.9 0.3 0.1 0.3 3.3
Revenue increases excluding large one-offs (commitment basis) 2.3 0.4 0.9 0.3 0.1 1.7 4.1

Reduction in primary spending (cash basis) 2.7 2.3 0.9 0.3 0.6 4.0 6.7
Current primary spending -1.0 1.2 0.8 0.4 0.6 3.0 2.0
Compensation of employees 0.6 -0.4 -0.7 -0.3 0.4 -1.1 -0.5
Goods and services -0.4 0.2 0.1 0.0 -0.1 0.2 -0.3
Subsidies -0.2 2.0 1.2 0.5 0.5 4.2 4.0
Of which: Agricultural (FISP and FRA) 0.7 0.1 0.4 0.5 0.4 1.5 2.2
Of which: Energy (fuel and electricity) -1.0 1.5 0.8 0.0 0.0 2.3 1.3
Social protection -0.6 0.0 -0.1 0.0 -0.1 -0.3 -0.8
Other -0.3 -0.5 0.3 0.2 0.0 -0.1 -0.4
Capital spending 3.6 1.1 0.1 0.0 -0.1 1.1 4.7

Increase in net clearance of expenditure arrears -1.6 5.4 -0.2 -0.2 -0.2 4.9 3.3
Sources: Zambian authorities; and IMF staff estimates and projections.
1
This line adjusts for the accumulation/clearance of arrears on VAT refund claims.

20. Domestic revenue mobilization is a key program objective (MEFP ¶42-47). Non-grant
fiscal revenues (adjusted for arrears on VAT refunds) should increase by about 3¼ percent of GDP
by 2025, compared to their pre-COVID 2019 level of 19.6 percent. By end-October 2022, the
authorities will prepare and adopt an action plan to boost revenue mobilization (structural
benchmark). Taking account of past technical assistance (TA) recommendations and estimated
costing of planned reforms, key reform priorities include (text table):

8
Fuel arrears and arrears to external contractors on foreign-financed capital spending are projected to be cleared by
2031 (MEFP ¶73). The government has hired six independent audit firms to audit the stock of budgetary arrears by
end-September 2022.

INTERNATIONAL MONETARY FUND 11

ZAMBIA

• Policy changes to increase revenues from CIT, VAT, and excises. These would include
broadening the VAT base and unifying the CIT rate to around 25-30 percent, 9 limiting VAT
exemptions on unprocessed foodstuffs to specific items that figure prominently in the food
basket of the poor, raising excises on tobacco and alcoholic beverages, and levying duties on
sugar-sweetened beverages, cement, coal, single-use plastics, fertilizers and pesticides.

• Improvements in tax administration, including from implementing a comprehensive

taxpayer compliance program based on data analytics. This will include improved tax audits
and compliance management, increased use of electronic fiscal reporting, and matching tax
and customs data on a regular basis.
• Removing implicit subsidies on fuel. In January 2021, to ease the impact of higher oil prices
and the kwacha depreciation, the authorities reduced excises on petrol and diesel and zero-
rated them for VAT purposes. These tax expenditures are projected to cost the budget 1.7
percent of GDP in 2022 but the authorities intend to eliminate them at end-September 2022
(structural benchmark). 10 This would follow the earlier removal of explicit fuel subsidies (see
¶18).
Zambia: Detailed Revenue Measures (2022–25)
Measures (% of GDP)
Tax 2022 2023 2024 2025 Total Notes
Mining CIT 0.0 0.2 0.1 0.1 0.3 better compliance
Non-mining CIT 0.0 0.1 0.1 0.0 0.2 better compliance and tax reform (base broadening, fewer preferential rates)
Value-added tax 1.5 0.4 0.2 0.1 2.2 in 2022, a reversal of measures on fuel and cooking oil
beyond 2022, possible measures should focus on base broadening and addressing the compliance gap
Excise taxes 0.2 0.1 0.0 0.0 0.4 in 2022, a partial reversal of measures on fuel
beyond 2022, possible measures should focus on higher and broader excise taxation
Mineral royalties 0.0 0.2 0.1 0.1 0.3 better compliance; any tax policy changes should be revenue-neutral
Total 1.7 0.9 0.5 0.3 3.4 of which 1.7 percent of GDP would happen in 2022, with the rest (1.7 percent) over 2023-25

21. On the expenditure side, key measures include curbing public investment and fuel
subsidies. The authorities will scale back their public investment program to focus on the highest
priority projects, including by cancelling, rescoping, or postponing a considerable share of the
contracted but undisbursed debt (prior action). This will reduce poorly targeted and inefficient
public investment that has yielded little in terms of growth or fiscal revenues in recent years (MEFP
¶73). To eliminate explicit fuel subsidies that were known to be regressive and that were crowding-
out critical social spending, 11 the authorities restored cost-plus pricing for petroleum products
in December 2021, also shortening the pricing cycle from 60 to 30 days (prior action).

9In the 2022 budget, the authorities lowered most CIT rates above 30 percent to 30 percent (with the exception of
the CIT rate on telecommunication companies) as the first step in a gradual process of harmonizing them. They also
made the mineral royalty tax deductible for CIT purposes, in line with international best practice and FAD TA
recommendations.
10The timing is expected to be aligned with the repurposing of the Tazama pipeline to distribute diesel, which is
expected to significantly reduce transport costs.
11
90 percent are estimated to go to households in the highest income decile, while the poorest 5 deciles receive only
1 percent.

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 ZAMBIA

22. The authorities are also targeting significant improvements in the governance and
efficiency of agricultural subsidies (MEFP ¶49 and ¶64-66). The planned reforms will gradually
reduce the cost of agricultural subsidies to around 1 percent of GDP by 2025. By end-November
2022, the authorities will publish the official guidelines to implement the new program (structural
benchmark), which will be implemented with the 2023-24 agricultural cycle. 12 To strengthen the
transparency, governance, and efficiency of the current program, the authorities published summary
information on procurement contracts related to the 2021 FISP (prior action), and are following the
regulations of the new Public Procurement Act for the 2022 FISP, including undertaking a public
tender process for procuring inputs and planned publication of key information on contracts
awarded (which will now include beneficial ownership information). In addition, they will introduce
biometric registration of beneficiaries to ensure benefits are reaching their intended target.

B. Enhanced Social Spending

23. A key objective of the authorities’ reform program is to gradually increase the level
and quality of social spending to reduce poverty and inequality, as well as improve access
to basic social services, especially in rural areas (MEFP ¶67-69). This will be critical to reverse
the increase in the poverty rate from 58.7 to 60.1 percent between 2015 and 2020. To achieve these
goals, the authorities need to address the low budget execution rates for social spending—
averaging only 65 percent over 2014-21—that have compromised the effectiveness of the
government’s pro-poor policies. 13 The above fiscal measures will not only contribute to fiscal
consolidation but will also free-up critical resources to ensure this desired increase in social
spending can be executed as planned.

24. Spending on social protection is projected to more than double from 0.7 percent of
GDP in 2020 to 1.6 percent by 2025 (around the average for Sub-Saharan African countries).
Over the course of 2021, with World Bank (WB) support, the number of recipients of the SCT
increased to 994,000—an almost 50 percent increase over 2019 recipients—and the monthly benefit
increased from 90 to 110 kwacha. Providing a critical mitigant against food security risks, the
number of recipient households for the Food Security Pack program similarly increased in 2021—
from 80,000 to 263,000 households—with a further expansion to 290,000 households planned for
2022. Other key social safety net programs—Keeping Girls in School and the Home-Grown School
Feeding Program—are seeing similar expansions. In addition, the authorities will continue
implementing the WB-financed Girls’ Education and Women’s Empowerment and Livelihood
(GEWEL) Project, which will be complemented with budgetary funds (MEFP ¶106). This expansion
in the social safety net will not only help address the fundamental poverty issue but will also
mitigate adverse effects on the poorest from the elimination of fuel and electricity subsidies (Box 2).

12
See footnote 6.
13Budget allocations for the social safety net have fared particularly poorly, with an average execution rate of only 54
percent.

INTERNATIONAL MONETARY FUND 13

ZAMBIA

25. Increased spending on health and education will provide greater access to these
critical services. In the health sector, expenditure projections reflect the authorities’ plans to hire
11,000 additional medical staff in 2022 (MEFP ¶48). In education, the authorities plan to add 30,000
teachers in 2022, while also providing access to free education for all. 14 Improved access to services
at the local level will also be supported by increased transfers to local governments, including for
school bursaries, as part of a fiscal decentralization strategy (MEFP ¶105). To ensure transparency
and accountability for this spending, credible steps are planned to strengthen fiscal institutions at
the subnational level (MEFP ¶51). Overall, for low-income households, the benefits from increased
social spending should outweigh the impact from the removal of fuel and electricity subsidies.

C. Restoring Debt Sustainability and Improving Debt Management and

Transparency

26. The debt sustainability analysis (DSA) confirms that, without restructuring, public debt
is in distress. All external debt burden indicators exhibit large and persistent breaches of their
prudent thresholds through the medium term and beyond under both baseline and stress scenarios.

27. To restore debt sustainability and achieve a “moderate” risk of debt distress over the
medium term, the authorities have requested a debt restructuring from creditors. The
authorities appointed financial and legal advisors in mid-2020 and have engaged all creditors in
early and constructive dialogue to lay the foundations for an orderly restructuring. They requested
a debt treatment under the G20 Common Framework (CF) in January 2021 and wrote to all private
creditors announcing the need for a debt treatment. Bondholders established a creditors committee
and hired their own advisors in mid-2020, and the Official Creditor Committee (OCC) under the
G20 CF was formed in June 2022.

28. Given the material spillover risks, the authorities intend to exclude domestically-issued
debt from the restructuring perimeter. Domestically-issued debt accounts for 48 percent of GDP
and represents the most significant source of budget financing in the near to medium term.
While non-residents hold about 26 percent of this stock, the Zambian financial sector holds the bulk.
In particular, these securities account for almost one third of banking sector assets (or about
12 percent of GDP). Therefore, any restructuring of this debt could trigger significant financial
instability, potentially requiring public resources to support the sector. It would also raise broader
economic risks by weakening market and business confidence, triggering capital outflows, and
reducing the private sector’s access to finance.

29. The authorities are planning a number of steps to strengthen debt management and
transparency going forward (MEFP ¶74-76). A new Public Debt Management (PDM) bill has been
submitted to the National Assembly, with timely enactment critical to controlling debt accumulation

14
Projections for the public wage bill in Tables 3a-3b reflect these plans. In addition, measures will be put in place to
ensure that staff recruited to serve rural communities remain in those communities.

14 INTERNATIONAL MONETARY FUND

 ZAMBIA

going forward (structural benchmark). 15 The draft bill, reflecting input from Fund staff, addresses key
weaknesses in the current Act that contributed to Zambia’s debt problems. The bill aims
to strengthen oversight, clarify objectives, tighten control on the authority to borrow, and enhance
risk management around guarantees for government on-lending. In addition, the bill usefully
clarifies the respective roles of various central government units involved in debt management.
The authorities have also started publishing a quarterly debt statistics bulletin with comprehensive
statistics (structural benchmark), and will also start publishing summary information on all newly
contracted external loans (structural benchmark). Finally, the authorities have provided detailed
information to Fund staff on all external debt contracted or guaranteed by the public sector, for
both disbursed and undisbursed debt (prior action).

30. In parallel, the authorities will limit the accumulation of new debt vulnerabilities.
As discussed in ¶21 above, the authorities have reviewed their pipeline of investment projects,
addressing the overhang of undisbursed debt. In line with the program ceiling, new disbursements
on contracted but undisbursed project loans will be limited to $1.4 billion during 2022-25 (including
$834 million from the World Bank and AfDB). New external borrowing will be limited to only
concessional debt—reflected in a continuous zero ceiling performance criterion on new non-
concessional borrowing and a ceiling on the present value of new external borrowing (MEFP
Table 3). The limit on the present value of new external borrowing is set in line with the expected
borrowing plan for 2022-23 (text table).

Zambia: Summary Table of Projected External Borrowing 1/

(January 1 to December 31, 2022)

PV of new debt in PV of new debt in
Volume of new debt
2022 (program 2022 (including
PPG external debt in 2022
purposes) negative GEs)
USD million Percent USD million Percent USD million Percent

By sources of debt financing 175.0 100 71.9 100 71.9 100

Concessional debt, of which 175.0 100 71.9 100 71.9 100
IFI debt 175.0 100 71.9 100 71.9 100
Other 0.0 0 0.0 0 0.0 0
Non-concessional debt, of which 0.0 0 0.0 0 0.0 0

By Creditor Type 175.0 100 71.9 100 71.9 100

IFI 175.0 100 71.9 100 71.9 100
Other 0.0 0 0.0 0 0.0 0

Uses of debt financing 175.0 100 71.9 100 71.9 100

Infrastructure 175.0 100 71.9 100 71.9 100

Memo Items
Indicative projections
Year 2 0.0 0.0 0.0
Year 3 0.0 0.0 0.0
1/ In line with the TMU definition of the debt ceilings, it does not include new financing from IMF, World
Bank, and projected issuances of local-currency debt to non-residents
Source: IMF staff calculations based on authorities' reported data.

15
This will replace the existing Loans and Guarantees Authorization Act.

INTERNATIONAL MONETARY FUND 15

ZAMBIA

D. Strengthening Governance

31. Further sustained efforts to tackle corruption and strengthen the anti-corruption
framework will be important for achieving program objectives. The authorities have signaled
a zero-tolerance approach to corruption (MEFP ¶80). At their request, a comprehensive IMF-staff
supported governance diagnostic assessment was launched in January 2022 to identify the main
governance weaknesses and corruption vulnerabilities, as well as measures to address them. 16
Once completed, the authorities plan to publish the diagnostic report, including its specific
recommendations (structural benchmark) and to develop and implement a comprehensive action
plan based on its recommendations.

32. To strengthen accountability and ensure the appropriate use of public resources going
forward, progress is being made on reforming key elements of the legal framework, as well as
on improving information systems and reporting standards. In addition to the ongoing work on
the PDM bill, the authorities have issued the regulations to implement the 2020 Public Procurement
Act (prior action, MEFP ¶63). The Act was revised in 2020, with the implementing regulations
finalized and issued in May 2022. The changes are intended to ensure public procurement becomes
more competitive (typically subject to public tender); more cost-effective, including by introducing
benchmark pricing provisions; and more transparent, with publication of the relevant details
of awarded contracts, including the names of the beneficial owners. 17

33. A new Public-Private Partnerships (PPPs) Act is also being developed to address key
weaknesses in the current framework and strengthen the management of fiscal risks
(structural benchmark, MEFP ¶82). The goal of the revisions is to ensure the transparent
evaluation of projects, align PPPs with fiscal realities, and limit unsolicited proposals. The revised Act
should also ensure greater control over SOEs’ PPP commitments. In addition to improving project
selection and appraisal, the new framework should strengthen the assessment and reporting
of contingent liabilities. To support a stronger PPP framework, the government also intends to issue
revised guidelines and train stakeholders involved in PPPs.

34. The authorities are planning other measures to help contain fiscal risks, particularly
those related to large SOEs (MEFP ¶81 and ¶83-84). Chief amongst these will be a move
to restore cost-reflective electricity tariffs and other measures outlined in Box 2. Furthermore,
supported by IMF staff’s TA, the authorities are developing a fiscal risk monitoring and management
framework. In addition to SOEs, the framework will also capture risks related to local governments,
PPPs, and climate shocks.

16
These measures will address fiscal governance (including public financial management, revenue administration,
public procurement, extractive industries, and state-owned enterprises), central bank governance, financial sector
oversight, anti-money laundering, and protection of property rights and contract enforcement.
17
Further work is needed to fully operationalize the associated register of beneficial owners, including to ensure
information collected is publicly accessible and as accurate, up-to-date, and complete as possible.

16 INTERNATIONAL MONETARY FUND

 ZAMBIA

Box 2. Zambia: Electricity Sector Reforms

ZESCO, the state-owned electricity company, is financially weak and represents a significant fiscal risk
(MEFP ¶59). The company has elevated operating costs largely driven by purchase agreements with IPPs and high
labor costs. It has also had significant capital investment needs in recent years. However, electricity tariffs and fees
are currently below cost-reflective levels, leading to the accumulation of significant losses during 2018-20. These
losses also reflected the need to import electricity during the 2019 drought and the kwacha’s depreciation during
that period. Consequently, all of ZESCO’s debt—both explicitly guaranteed and non-guaranteed—is included in
the measure of PPG debt used in the DSA. As of end-2021, ZESCO’s debt amounts to about $1.5 billion in loans
(including to finance the Kafue Gorge Lower hydro project), on top of $1.4 billion of payables outstanding to local
and external IPPs.

In December 2020, the ZESCO board approved a turnaround strategy to help restore the company’s
financial viability (MEFP ¶60 and ¶101). Introducing cost-reflective tariffs—while maintaining lifeline tariffs for
low-income households—is expected to address ZESCO’s chronic revenue shortfall. Operating costs are expected
to be curtailed through re-negotiated power purchase agreements and a voluntary separation scheme to support
a reduction in labor costs. Capital expenditures will also be optimized, including through a review of non-
committed investment projects. The government is planning to initiate a process of optimizing and strategically
divesting ZESCO’s operating assets in 2023. Finally, ZESCO’s external debt is expected to be included in the
restructuring operation which will help improve the company’s balance sheet structure.

Efforts to boost revenue collection and reduce operating expenses are already yielding early results. In
2021, ZESCO recorded a substantial operating profit, with overall earnings also benefiting from kwacha
appreciation. Introducing a multi-year tariff framework (MYTF) that will restore cost-reflective tariffs, and ensure
future tariff adjustments when underlying cost conditions change, will be critical to a more durable recovery
(structural benchmark). Such a framework will be based on the recently completed Cost-of-Service Study (COSS).
To inform the authorities’ response to the COSS, key stakeholders were invited to review the study. Once Cabinet
has approved the response, which will also outline the authorities’ policy intentions with respect to the MYTF, they
will publish both the COSS and their response (prior action). At that point, ZESCO will request the adoption of the
MYTF from the Energy Regulation Board (ERB). That will be subject to a public consultation before the ERB can
make its decision.

35. The government has committed to strengthen commitment controls (structural

benchmark, MEFP ¶56 and ¶78). The goal is for all commitments assumed by 59 ministries,
provinces, and spending agencies (MPSAs) to be registered electronically, through IFMIS, by mid-
2023. Currently, only approximately 30 percent of commitments against budget allocations are
recorded electronically. Work on enhancing the functionality of IFMIS to support this has been
completed, controlling officers and budget personnel have been trained, and the roll-out of these
new IFMIS functionalities has begun.

E. Strengthening Monetary Policy and Re-Building External Resilience

36. Inflation and FX pressures have abated but risks remain. Inflation is expected to continue
receding, helped by a stronger kwacha, and despite the one-off impact from energy price
adjustments. Over the course of the program, inflation is expected to return to the BoZ’s 6-8 percent
policy band, supported by the planned fiscal consolidation. FX market conditions are also expected
to continue improving on the back of better supply, including disbursements from international
financial institutions (IFIs). However, both currency and inflation pressures could reappear—for

INTERNATIONAL MONETARY FUND 17

ZAMBIA

example, due to a reversal in recent capital inflows, copper price volatility, or climate shocks—and
the BoZ confirmed its readiness to tighten policy should these risks materialize (MEFP ¶85).

37. The program targets a gradual build-up in international reserves to strengthen

resilience to external shocks. A cost-benefit analysis developed by Fund staff for low-income
countries suggests—after taking account of Zambia’s open capital account and vulnerability to
copper price and climate shocks—an optimal level of unencumbered reserves of around five months
of prospective imports. 18 Achieving this level of reserves should be feasible by 2025, thanks to the
supply factors mentioned above and the planned fiscal adjustment and energy reforms, both of
which should reduce FX demand. This, together with addressing the external debt overhang, should
strengthen Zambia’s external position, which is currently assessed to be weaker than the level
implied by fundamentals and desirable policies (Annex II).

38. The BoZ has committed to reviewing current FX market rules, and normalizing its
interaction with the FX market (MEFP ¶89). As the pandemic unfolded and pressures on the
kwacha mounted, the authorities took a number of measures to manage the market, including (i)
tightening interbank foreign exchange market quotation rules; (ii) use of moral suasion; and (iii)
informal prioritization of FX demand from specific sectors. In addition, the BoZ became the
dominate supplier of FX to the market due to a new administrative measure that resulted in mining
taxes being paid in U.S. dollars directly to the government, significantly changing the dynamics of
the market. As pressures have started to wane, the authorities have begun reversing some of these
measures.

39. The BoZ will continue upgrading its monetary policy framework and improving
monetary policy transmission (MEFP ¶85-88). The new Bank of Zambia Act (submission is a prior
action), which is pending Presidential assent, should enhance monetary policy credibility. The new
Act will strengthen the BoZ’s mandate, autonomy (operational, personal, and financial), and
governance. Other IMF staff’s TA-supported reforms to enhance the monetary policy framework,
central bank operations, and its forecasting capacity are being considered.

F. Safeguarding Financial Stability

40. Safeguarding financial stability remains a priority (MEFP ¶90-95). The BoZ will unwind
the temporary prudential measures taken to address the COVID-19 pandemic in accordance with
the original timelines or as financial conditions allow. In the interim, it will maintain its guidance that
banks should follow standard prudential rules, while using the temporary flexibility to support
borrowers hit by the pandemic. The BoZ will continue to enhance its supervisory capacity and
closely monitor the evolution of loans linked to temporarily-relaxed prudential rules. A review of the

18
This corresponds to a total (encumbered and unencumbered) reserve target of about 5.5 months of imports.
Encumbered reserves typically include commercial banks’ FX deposits held at the BoZ in fulfillment of reserve
requirements and aid-related funds temporarily held in escrow. For a general description of the IMF reserve
adequacy assessment methodology, see Assessing Reserve Adequacy, IMF Policy Paper, February 2011, and Guidance
Note on the Assessment of Reserve Adequacy and Related Considerations, June 2016.

18 INTERNATIONAL MONETARY FUND

 ZAMBIA

banking sector is also underway to prepare for the post-pandemic period. It will assess the
effectiveness of banking sector intermediation during the pandemic, as well as the impact of the
pandemic on banks’ capital and systemic risk. The review will incorporate the planned thematic
examination of asset quality. The review, scheduled for completion by end-2022 (structural
benchmark), will also include an assessment of the implications of increased digitalization of the
economy (and related developments in the payment systems) for competition in the banking sector
and more broadly for financial sector development. As part of efforts to strengthen safety net
arrangements, the BoZ will implement a Deposit Protection Scheme, supported by a dedicated unit
established in June 2022. Furthermore, a crisis management and resolution framework has been
established, and will be fully operational once the governance arrangements have been finalized,
as provided for in the new Bank of Zambia Act. The BoZ is also working to enhance its macro-
prudential surveillance framework and has developed a macro-prudential toolkit aimed at mitigating
risks due to excessive credit growth, leverage, maturity mismatches, market illiquidity, exposure
concentration, and moral hazard.

G. Improving Statistical Capacity

41. The authorities are working on addressing existing gaps in BOP statistics (MEFP ¶112-
114). Zambia’s BOP has historically been characterized by diverging trends between the current
account and reserve assets—e.g., reserves declined in 2020 despite a large current account surplus.
This was previously believed to be driven by non-repatriated copper export receipts, as mining
companies take full advantage of Zambia’s open capital account to accumulate assets abroad.
However, recent analysis of cross-border transactions points to some underreporting of BOP
outflows, including imports of goods and services. An IMF-supported TA program is ongoing, with
the objective of further understanding the nature of these underreported flows and addressing the
uncertainties surrounding the BoP, including through outreach to the mining sector. The authorities
have committed to improving their BOP compilation process by (i) strengthening data analysis
capacity and systematically cross-referencing BOP transactions across various data sources; (ii)
stepping up outreach to private operators involved in cross-border transactions; and (iii) improving
the quality of the underlying BOP surveys.

PROGRAM MODALITIES AND OTHER ISSUES

42. Overall financing needs. Zambia’s BOP financing needs are estimated at $11 billion over
2022-25 (Table 6), consistent with the objective of bringing unencumbered reserves to a level of five
months of prospective imports.

43. The authorities are seeking a debt restructuring to ensure the program is fully
financed and to achieve the objective of bringing the risk of debt distress to “moderate” over
the medium term. To close the BOP financing gap, the authorities are seeking cash debt relief from
the debt restructuring amounting to $8.4 billion during the program period (2022-25). To bring
Zambia’s risk of debt distress to “moderate” over the medium term, the requested debt relief would
need to bring the debt service-to-revenue ratio to 14 percent by 2025, and maintain it at this level

INTERNATIONAL MONETARY FUND 19

ZAMBIA

(on average) for the remainder of the 10-year horizon (2026-2031). This would imply some
additional cash debt relief will be needed over 2026-31. Achieving this goal also implies the
restructuring would need to bring the PV of external debt-to-exports ratio to a level consistent with
“substantial space” to absorb shocks by 2027. For countries with weak debt-carrying capacity like
Zambia, this level is 84 percent. 19, 20 An illustrative restructuring scenario that meets these goals is
reflected in the text figure below.

Illustrative Restructuring Scenario - Indicators of PPG External Debt, 2022–32

PV of debt-to GDP ratio PV of debt-to-exports ratio

140 300

120 250

100
200
80
150
60
100
40

20 50
Most extreme shock: Exports Most extreme shock: Exports
0 0
2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

Debt service-to-exports ratio Debt service-to-revenue ratio

25 90

80
20 70

60
15
50

40
10
30

20
5
10
Most extreme shock: Exports Most extreme shock: Exports
0 0
2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

Baseline Historical scenario Most extreme shock 1/ Threshold

Source: IMF staff projections based on LIC DSF.

44. Program access and phasing. To help fill the residual financing gap of $2.6 billion, the
authorities have requested a 38-month arrangement under the Extended Credit Facility (ECF) in
the amount of SDR 978.2 million (100 percent of quota, about $1.3 billion, or 5.0 percent of GDP).
The proposed access reflects both the size of Zambia’s BOP needs and the strength of its policy
ambitions under the program. Fifty percent of each disbursement will be on-lent by the central bank
to the government to help finance the budget, while the remainder will help rebuild BoZ reserves.
A Memorandum of Understanding between the government and the BoZ will be established to set
their respective responsibilities for servicing financial obligations to the Fund. Access will be phased
uniformly over the life of the program, in line with the proposed schedule of reviews and
disbursements in Table 7.

19
In line with the criteria set out in the LIC-DSF.
20 Given the ongoing work to rebase GDP and the associated measurement challenges, the PV of debt-to-exports
ratio was used as the main indicator to assess the evolution of the debt stock.

20 INTERNATIONAL MONETARY FUND

 ZAMBIA

45. Fund financing is expected to close about 12 percent of the projected 2022-25 overall
BOP financing gap, while playing an important catalytic role in attracting external financing.
Access under the proposed ECF-supported arrangement will cover 51 percent of the residual
financing gap after accounting for the financing from the external debt restructuring. The remainder
will be filled by other development partners (principally the World Bank), for which firm
commitments are in place for the upcoming 12-month period. Good prospects for full program
financing exist for the remainder of the program period.

Zambia: Proposed Program Financing

($ million)
2022 2023 2024 2025 Total

Financing Gap 3,068 2,346 3,192 2,430 11,036

Official financing 737 664 633 592 2,626

IMF ECF 190 382 386 388 1,346
World Bank 1/ 547 282 247 204 1,280

Financing from external debt restructuring 2,331 1,682 2,559 1,838 8,410

Source: IMF staff estimates and projections.

1/ Includes assumed financing from the World Bank of, among others, a Development Policy Operation of $275 million and emergency
health sector financing of $150 million that will support budget implementation.

46. Staff’s assessment is that there are sufficient assurances regarding the debt
restructuring needed to restore debt sustainability. The OCC provided financing assurances
through committee discussions and a joint statement published on July 30. The authorities are
committed to finalizing the MOUs with official creditors by the time of the first review, and to
reaching agreements on comparable terms with other creditors by the time of the second review,
at the latest (MEFP ¶73).

47. The authorities have engaged actively with all external private creditors on the need
for debt restructuring. This has been done through creditors’ financial and legal advisors, as well
as by sharing relevant non-confidential information through open discussion forums and the
publication of debt statistics reports and technical presentations summarizing key macro
developments and the government’s economic program. The authorities’ advisors have also shared,
under non-disclosure agreements, key information presented to the G20 OCC so that private
creditors have an early opportunity to provide input on the design of restructuring strategies. Staff
assesses that prompt Fund support is considered essential for the successful implementation of the
member’s adjustment program and that the authorities are making a good faith effort to reach
a collaborative restructuring agreement, as required under the Fund’s Lending into Arrears (LIA)
policy. At end-2021, Zambia reported $280 million in interest arrears to Eurobond holders,
$632 million to other private external creditors (both interest and principal), and about $1.3 billion

INTERNATIONAL MONETARY FUND 21

ZAMBIA

in other accounts payable to external suppliers (ZESCO IPP external arrears, fuel and contractor
arrears). 21

48. Zambia reported $1.3 billion of interest and principal arrears to official bilateral
creditors as at end-2021. As the OCC has provided financing assurances that are adequately
representative and include representatives of the Paris Club creditors, arrears to other official
bilateral creditors are deemed away under the Lending into Official Arrears (LIOA) Policy.

49. Zambia reported $6.1 million of interest and principal arrears to IFIs as at end-2021, 22
of which $0.93 million are estimated to be technical interest arrears owed to the World Bank, AfDB,
IFAD, and EIB. These arrears were cleared by end-March 2022, with the exception of arrears owed
to the Nordic Development Fund (NDF). Arrears to the NDF reached $1.16 million as at end-March
2022. There is no indication yet whether the OCC would expect comparability of treatment (CoT)
from the NDF. While NDF is not a global IFI, staff understands that it participated in the Heavily
Indebted Poor Countries Initiative and was previously excluded from CoT by the Paris Club. Based
on available information, staff assesses that there is a credible plan in place to clear these arrears.

50. Capacity to repay and program risks (Table 8). Zambia’s capacity to repay the Fund is
adequate under the baseline, with debt service to the Fund projected to peak at 1.2 percent of
exports. Fund credit outstanding to GDP peaks at 4.2 percent in 2025 and debt service to revenue
excluding grants at 2.4 percent in 2031, both above the third quartile of past UCT-quality
arrangement for low-income countries (Figure 5). This is subject to significant risks and contingent
on full program implementation and financing from other creditors. Risks to the program and to the
Fund are elevated given the complexity, scale, and scope of the needed reforms; the constrained
institutional capacity; the ongoing debt restructuring discussions; and broader risks to the outlook,
including from copper prices. These risks could lead to policy slippages and reversals, as well as
larger-than-envisaged financing gaps, and slippages in key fiscal targets. 23 Risks are mitigated by
the strong political support for the program, the comprehensive and ambitious set of prior actions,
the front-loading of the proposed fiscal adjustment and structural reforms, and Zambia’s strong
track record of repaying the Fund.

51. The PRGT enhanced safeguard requirement on debt composition is met. While the
share of multilaterals and other IFIs in Zambia’s FX-denominated external debt is expected to
increase to 30 percent over the program period (from 16 percent at end-2021, see Text Table 1,
DSA), it remains well below the mean and median for PRGT programs, indicating a significant buffer
of restructurable debt. FX-denominated external debt with some form of security or escrow
arrangement that could be considered as collateralized debt stood at about 9.5 percent of GDP at

21
According to the authorities’ financial and legal advisors, no claims in default have been accelerated and, therefore,
the amount of arrears reflects only unpaid amounts as at end-2021.
22
This amount includes arrears owed to IFIs (IDA, AfDB, IFAD, EIB, BADEA, NDF and OFID), but excludes arrears owed
to regional banks such as ESA Trade Development Bank and Afreximbank, which also have non-sovereign
shareholders.
23
Including due to the measurement challenges in the BOP.

22 INTERNATIONAL MONETARY FUND

 ZAMBIA

end-2021, and is expected to decline under program as it is included in the authorities’ restructuring
request.

52. Prior actions (MEFP Table 1). To partially mitigate the significant risks associated with the
program, and as a demonstration of their commitment to program objectives, the authorities have
completed all but one prior action. The publication of the COSS and the government’s response will
be completed ahead of the Executive Board’s consideration of the program request (MEFP ¶60).

53. Monitoring of program performance. Program performance will be monitored through

semi-annual program reviews based on quarterly and continuous quantitative targets and structural
benchmarks, as follows:

• Quarterly and continuous quantitative targets (MEFP Table 3). The program will include
quantitative performance criteria on the primary balance, new central bank credit to the
central government, and net official international reserves. Continuous performance criteria
will cover new external debt arrears and the contracting or guaranteeing of new non-
concessional external debt. Inflation will be monitored through a monetary policy consultation
clause. Indicative targets will target fiscal revenues, new external borrowing, the disbursement
of contracted but undisbursed external debt, social spending, and the net clearance of
budgetary arrears.

• Structural benchmarks (MEFP Table 2) will aim to support the key objectives of the program,
namely, to restore fiscal and debt sustainability, improve debt management and transparency,
strengthen governance and financial stability, and reduce corruption vulnerabilities.

54. An updated safeguards assessment of the BoZ is in progress. The assessment identified
areas for improvement in the BoZ’s safeguards framework. Transparency and accountability
mechanisms need to be enhanced through stronger oversight and audit quality procedures.
The process for compilation of program monetary data should be reinforced.

55. Statistical issues and capacity development (CD) priorities. Data provision is broadly
adequate for surveillance but there are shortcomings in national accounts, monetary, fiscal, and
external sector statistics. Staff encouraged the authorities to implement Fund TA advice and to seek
further TA in the areas where Zambia needs to strengthen its data provision capacity. CD priorities,
driven by the authorities’ policy objectives, include tax policy and administration, PFM, debt
management, real and external sectors statistics, and governance reforms. Zambia is a medium-
intensity user of Fund TA with a mixed implementation record.

STAFF APPRAISAL
56. Despite some positive signs, Zambia continues to face deep socio-economic challenges
reflected in high poverty levels and low growth. The roots of the current economic crisis lie in
years of economic mismanagement and especially in an overly ambitious and inefficiently managed
public investment drive. However, dividends in the form of faster growth or higher tax revenues

INTERNATIONAL MONETARY FUND 23

ZAMBIA

have yet to materialize. A drought in 2019 and the COVID-19 pandemic exacerbated the acute
economic and social challenges already facing the country, with poverty, inequality, and malnutrition
rates amongst the highest in the world. As a result, Zambia is in debt distress, defaulting on its
Eurobonds in November 2020 while also accumulating arrears to other creditors. The war in Ukraine
has amplified macroeconomic pressures by increasing global prices of fuel and fertilizer.
With significant downside risks to the outlook, including from copper prices, the authorities need
to adhere to a strong implementation of policies and reforms, and adequately plan for any
contingencies.

57. Fiscal sustainability urgently needs to be restored through a large, upfront, and
sustained fiscal consolidation. The authorities’ fiscal consolidation plans are appropriately
anchored on sharply reducing public investment, eliminating regressive fuel subsidies, and
reforming the agricultural subsidy program, where decisive action is needed to ensure
implementation of the reforms in time for the 2023/24 growing season. Domestic revenue
mobilization should also support the adjustment over the medium term. The adjustment should
create fiscal space for increased social spending to cushion the burden on the most vulnerable.
The expansion of the Social Cash Transfer program is particularly welcome, as are the authorities’
plans to increase public spending on health and education.

58. Together with the fiscal adjustment, Zambia needs a deep and comprehensive debt
treatment under the G20 Common Framework to place public debt on a sustainable path.
A considerable share of the contracted but undisbursed debt—and associated public investment
projects—needs to be canceled, rescoped, or postponed. Significant improvements in debt
management and transparency will be required to contain debt vulnerabilities and upgrade the
country's debt-carrying capacity.

59. A substantial strengthening of fiscal controls and governance is needed to support

fiscal adjustment, as well as address governance and corruption vulnerabilities. The authorities
have appropriately adopted a strategy to halt the accumulation of domestic arrears and gradually
clear the existing stock. All government agencies should be required to register their purchase
orders in IFMIS to ensure that ongoing spending commitments are adequately monitored. Public
investment management and procurement practices need to be strengthened to ensure
transparency and the efficient use of scarce resources. The framework for monitoring fiscal risks,
particularly those related to large SOEs, needs to be urgently bolstered. The anti-corruption and
AML/CFT frameworks should be strengthened in line with the recommendations of the ongoing
Governance Diagnostic Assessment.

60. The Bank of Zambia should persist in its efforts to reduce inflation, support the
recovery, and preserve financial stability. The exchange rate should continue to reflect market
conditions, and international reserves should gradually be replenished as market conditions allow,
with market interventions otherwise limited to smoothing out excessive volatility. Financial stability
should be preserved by addressing high NPL levels and deteriorating capital buffers, as well as
by enhancing policies to safeguard financial sector stability.

24 INTERNATIONAL MONETARY FUND

 ZAMBIA

61. Based on the strength of the proposed program, the prior actions taken by the
Government of Zambia, and the financing assurances provided by official bilateral creditors,
staff supports the authorities’ request for a 38-month ECF arrangement in the amount
equivalent to SDR 978.20 million (100 percent of Zambia’s quota).

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 ZAMBIA

Figure 1. Zambia: Recent Developments, 2000–22

Growth is expected to slow down in 2022 after a strong recovery The 2022 slowdown is driven by a contraction in
in 2021. agriculture and the mining sector.

The kwacha depreciated through mid-2021 but has appreciated Inflation has slowed down markedly from its 25 percent
sharply since the August 2021 elections. peak in July 2021 to under 10 percent in June 2022.

Sources: Zambia Central Statistics Office; LME; IMF, World Economic Outlook database; and IMF staff estimates and projections.

26 INTERNATIONAL MONETARY FUND

 ZAMBIA

Figure 2. Zambia: External Sector, 2013–22

(Thousands of U.S. dollars, unless otherwise specified)

The current account deficit has turned into a large surplus… …reflecting higher copper prices…

…and depressed imports. Despite sizable other outflows that proxy for copper receipts held
abroad…

…the stock of reserves grew in 2021, boosted by the SDR …as well as large inflows of foreign investment.
allocation and higher copper prices…

Sources: Bank of Zambia and IMF staff forecasts.

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Figure 3. Zambia: Fiscal Developments, 2016–21

(Percent of GDP, unless otherwise specified)

Indirect taxes bore the brunt of the COVID shock, while Primary budget spending was dominated by the wage bill, public
income taxes and non-tax revenues held up well. investment, and (increasingly) subsidies.

Larger-than-budgeted cash deficits were driven mostly by The cash deficit was increasingly financed with domestic resources.
spending overruns.

There was a substantial accumulation of arrears (including Public debt rose rapidly in recent years.
on VAT refunds).

Sources: MoF and IMF staff forecasts.

Note: Public debt as shown here covers central government and is divided into domestic and external on a currency basis.

28 INTERNATIONAL MONETARY FUND

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Figure 4. Zambia: Monetary & Financial Developments

Policy Rate and Interbank Rate Average Lending and Deposit Rates
(Percent) (Percent)

Government T-Bills and Bonds Yields Exchange Rates

(Volume-weighted, Percent) (Average Kwacha per USD; 2010=100)

Commercial Banks’ Forex Purchase International Reserves

(14-day average, millions of U.S. dollars) (billions of U.S. dollars)

Sources: Bank of Zambia.

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 ZAMBIA

Figure 4. Zambia: Monetary & Financial Developments (concluded)

Reserve Money Broad Money

(Monthly average, millions of Kwacha) (Billions of Kwacha)

Outstanding Government Securities Foreign Holdings of Government Securities

(T-bills and bonds, billions of Kwacha, face value) (Face Value, billions of Kwacha)

Bank Credit to Domestic Economy Bank Credit Growth

(Billions of Kwacha) (Year-on-Year Percent Change)

Sources: Bank of Zambia.

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Figure 5. Zambia: Capacity to Repay Indicators Compared to UCT Arrangements for PRGT Countries
(In Percent of the indicated variable)
Total Fund Credit Outstanding Total Fund Credit Outstanding Total Fund Credit Outstanding
(Percent of GDP) (Percent of gross international reserves) (Percent of PPG External Debt)
5 Interquartile Range 40 20
Median
4
Zambia Baseline 30 15
3
20 10
2
10 5
1

0 0 0
T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10

Total Debt Service to the Fund Total Debt Service to the Fund Total Debt Service to the Fund
(Percent of revenue excl. grants) (Percent of exports of goods and services) (Percent of PPG External Debt Service)
3.0 1.8 40
2.5 1.5
30
2.0 1.2
1.5 0.9 20
1.0 0.6
10
0.5 0.3
0.0 0.0 0
T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10 T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8 T+9 T+10

35 Largest Peaks for Fund Credit Outstanding 35 Largest Peaks for Debt Service to the Fund
(Percent of GDP) (Percent of revenue excl. grants)
12 Zambia 25th Percentile of Peaks 75th Percentile of Peaks 10
10 8
8
6
6
4
4
2 2
0 0
KEN2015
LBR2012
GNB2015

SLB2011
ETH2019
ZMB2022
SLE2013

GRD2014

HTI2010

KEN2016

BDI2012

MDA2010
MDA2016
SLE2010

LBR2019
SLE2017
SLE2018
SLB2011

GNB2010

KEN2016
GRD2014

ZMB2022

HTI2010

GRD2010

BDI2012
LBR2012

SLE2010
MDA2016

LBR2019
SLE2018

STP2015
MWI2010
RWA2016
COG2019

CIV2011
GIN2017
MWI2012
GMB2020
STP2019
MWI2018

MDG2016

AFG2020

GMB2012

TCD2017

CAF2012

GEO2012
MWI2010
AFG2020

CIV2016

MDG2016
GIN2012
KGZ2011
GIN2017
LSO2010
MWI2018
CIV2011
TCD2017

COG2019

STP2019

MWI2012

GEO2012
CAF2012
GMB2012

CAF2016

TGO2017

TGO2020
MRT2010

MRT2017

TGO2017

TGO2020

Notes:
1) T = date of arrangement approval. PPG = public and publicly guaranteed.
2) Red lines/bars indicate the CtR indicator for the arrangement of interest.
3) The median, interquartile range, and comparator bars reflect all UCT arrangements (including blends) approved for PRGT
countries between 2010 and 2020.
4) PRGT countries in the control group with multiple arrangements are entered as separate events in the database.

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Table 1. Zambia: Selected Economic Indicators, 2018–25

2018 2019 2020 2021 2022 2023 2024 2025

Projections
National accounts and prices
GDP growth at constant prices 4.0 1.4 -2.8 3.6 3.0 3.9 4.1 4.5
Agriculture -21.2 7.7 17.2 -0.7 -4.4 8.8 4.0 4.0
Mining 6.3 -5.1 8.0 -6.3 3.1 3.5 5.6 6.2
Non-mining, non-agricultural 6.1 1.8 -5.3 5.2 3.5 3.5 3.9 4.4
GDP deflator 7.4 7.6 13.7 23.4 8.4 8.7 7.3 6.8
GDP at market prices (millions of kwacha) 275,175 300,449 332,223 424,453 473,917 535,028 597,667 667,213

Consumer prices
Consumer prices (average) 7.5 9.2 15.7 22.0 13.0 9.5 7.6 7.1
Consumer prices (end of period) 7.9 11.7 19.2 16.4 12.7 8.0 7.3 7.0

External sector
Terms of trade (deterioration -) -1.9 -10.5 19.0 21.9 -8.6 -2.3 -0.4 -0.4
Average exchange rate (kwacha per U.S. dollar) 10.5 12.9 18.3 20.0 … … … …
(percentage change; depreciation +) 9.9 23.3 42.3 9.1 … … … …
End-of-period exchange rate (kwacha per U.S. dollar) 11.9 14.1 21.2 16.7 … … … …
Current account balance -1.3 1.4 12.0 7.6 1.4 0.3 2.5 2.7
Gross international reserves (months of prospective imports) 2.4 3.0 1.9 3.2 3.3 3.9 4.6 5.5

Money and credit

Reserve money (end of period) -0.6 25.8 57.0 8.5 14.7 17.8 10.8 17.2
Broad money (M3) 16.5 12.5 46.4 3.7 11.0 12.1 10.8 8.2
Credit to the private sector (percent of GDP) 11.7 12.5 12.3 8.9 9.2 9.3 9.5 9.8

National accounts
Gross investment 38.6 39.3 32.3 28.7 31.6 31.5 31.5 31.6
Government 8.6 9.4 7.8 4.1 3.0 3.0 3.0 3.1
Private 30.1 29.8 24.5 24.5 28.5 28.5 28.5 28.5
National savings 37.3 40.7 44.3 36.3 32.9 31.8 34.0 34.3

Central government budget

Revenue 19.4 20.4 20.3 23.3 21.4 22.3 22.7 22.8
Taxes 16.1 16.1 15.7 16.8 16.7 17.6 17.9 18.1
Grants 0.2 0.3 0.5 0.6 0.4 0.3 0.3 0.3
Other revenue 3.1 4.0 4.1 6.0 4.3 4.3 4.4 4.4
Expenditure 27.7 29.8 34.1 31.8 30.8 29.4 28.9 27.7
Expense 19.1 20.4 26.3 27.7 27.7 26.5 25.9 24.6
Net acquisition of nonfinancial assets 8.6 9.4 7.8 4.1 3.0 3.0 3.0 3.1
Net lending/borrowing (cash basis) -8.3 -9.4 -13.8 -8.5 -9.4 -7.1 -6.3 -4.9
Net lending/borrowing (commitment basis) -11.7 -13.9 -17.4 -14.5 -6.9 -4.9 -4.3 -3.1
Primary balance (commitment basis)1 -6.9 -6.9 -10.1 -6.0 0.7 2.2 2.7 3.2
1
Primary balance excluding mining revenues (commitment basis) -9.2 -9.4 -13.3 -11.9 -5.0 -3.0 -2.7 -2.3

Public debt
Total public debt (gross, end-period)2,3 77.8 103.3 150.3 126.0 122.8 115.6 109.7 104.7
4
External 48.1 62.1 95.8 64.7 69.5 69.1 68.5 67.3
Domestic 29.7 41.2 54.5 61.3 53.3 46.5 41.3 37.4
Sources: Zambian authorities; and IMF staff estimates and projections.
1
Adjusted for the accumulation/clearance of VAT refund claims and expenditure arrears.
2
Nonresident holdings of local currency debt are included under domestic debt here, unlike in the DSA, which is conducted on a residency basis.
3
Including arrears.
4
Public and publicly guaranteed external debt.

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Table 2a. Zambia: Balance of Payments, 2018–25

(Millions of U.S. dollars, unless otherwise indicated)
2018 2019 2020 2021 2022 2023 2024 2025
Projections
Current account -341 325 2,181 1,616 371 85 759 858

Trade balance 514 938 3,216 4,731 2,935 2,561 2,897 3,100
Exports, f.o.b. 9,029 7,246 8,003 11,115 11,908 12,211 12,982 13,851
Of which: Copper 6,658 4,995 5,868 8,345 8,920 9,081 9,620 10,249
Imports, f.o.b -8,515 -6,308 -4,787 -6,384 -8,973 -9,650 -10,085 -10,751

Services (net) -724 -522 -494 -776 -940 -976 -1,044 -1,119

Income (net) -407 -414 -763 -2,658 -1,990 -1,884 -1,524 -1,581
Of which: Interest on public debt -567 -627 -635 -736 -936 -922 -822 -770

Current transfers (net) 276 322 221 319 366 384 429 459
Budget support grants 0 0 0 0 0 0 0 0
Sector-wide approach grants 0 0 0 0 0 0 0 0
Private transfers 276 322 221 319 366 384 429 459

Capital and financial account 123 -522 -3,448 -1,496 -3,175 -1,650 -2,977 -1,865

Capital account 66 97 80 77 88 83 80 77
Project grants 66 97 80 77 88 83 80 77

Financial account 57 -618 -3,528 -1,573 -3,263 -1,733 -3,057 -1,943

Foreign direct investment (net) 363 -148 -208 -3 1,075 1,113 1,476 1,628
Portfolio investment (net) -238 -53 194 717 229 329 414 591
Financial derivatives (net) 32 84 -10 -30 39 60 110 218
Other investments (net) -100 -501 -3,503 -2,256 -4,606 -3,234 -5,057 -4,380
Public sector (net) 1,740 1,416 -2 -1,346 -2,003 -1,440 -2,347 -1,805
Disbursements 2,189 2,073 1,424 571 511 469 382 265
Of which: Budget support 0 0 0 0 0 0 0 0
Amortization due -449 -657 -1,426 -1,917 -2,513 -1,909 -2,729 -2,070
Monetary Authority (SDR Allocation) 0 0 0 1,328 0 0 0 0
Commercial banks (net) -130 295 -413 -205 -164 20 54 165
Other sectors -1,709 -2,212 -3,088 -2,033 -2,440 -1,814 -2,764 -2,740

Errors and omissions -226 61 -288 -621 0 0 0 0

Overall balance -444 -136 -1,555 -501 -2,804 -1,565 -2,219 -1,008

Financing 444 75 233 -1,671 -265 -781 -973 -1,422

Central bank net reserves (- increase) 444 75 233 -1,671 -265 -781 -973 -1,422
Exceptional financing 0 61 1,322 2,172 2,878 1,964 2,806 2,042

Financing gap 0 61 1,322 2,172 3,068 2,346 3,192 2,430

Memorandum items:
Current account (percent of GDP) -1.3 1.4 12.0 7.6 1.4 0.3 2.5 2.7
Total official grants (percent of GDP) 0.3 0.4 0.4 0.4 0.3 0.3 0.3 0.2
Change in copper export volume (percent) 2.8 -18.5 14.4 -5.7 6.7 6.6 6.5 6.5
Copper export price (U.S. dollars per tonne) 6,530 6,010 6,175 9,317 9,595 9,374 9,342 9,310
Crude oil price 68 61 41 69 106 95 84 77
Gross international reserves (millions of U.S. dollars) 1,569 1,450 1,203 2,796 3,060 3,841 4,814 6,237
In months of prospective imports 2.4 3.0 1.9 3.2 3.3 3.9 4.6 5.5
Sources: Zambian authorities; and IMF staff estimates and projections.

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Table 2b. Zambia: Balance of Payments, 2018–25

(Percent of GDP, unless otherwise indicated)
2018 2019 2020 2021 2022 2023 2024 2025
Projections
Current account -1.3 1.4 12.0 7.6 1.4 0.3 2.5 2.7

Trade balance 2.0 4.0 17.8 22.3 10.9 9.1 9.6 9.6
Exports, f.o.b. 34.3 31.1 44.2 52.4 44.3 43.4 43.1 42.9
Of which: Copper 25.3 21.4 32.4 39.4 33.2 32.3 31.9 31.7
Imports, f.o.b -32.4 -27.1 -26.4 -30.1 -33.4 -34.3 -33.5 -33.3

Services (net) -2.8 -2.2 -2.7 -3.7 -3.5 -3.5 -3.5 -3.5

Income (net) -1.5 -1.8 -4.2 -12.5 -7.4 -6.7 -5.1 -4.9
Of which: Interest on public debt -2.2 -2.7 -3.5 -3.5 -3.5 -3.3 -2.7 -2.4

Current transfers (net) 1.0 1.4 1.2 1.5 1.4 1.4 1.4 1.4
Budget support grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Sector-wide approach grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Private transfers 1.0 1.4 1.2 1.5 1.4 1.4 1.4 1.4

Capital and financial account 0.5 -2.2 -19.0 -7.1 -11.8 -5.9 -9.9 -5.8

Capital account 0.3 0.4 0.4 0.4 0.3 0.3 0.3 0.2
Project grants 0.3 0.4 0.4 0.4 0.3 0.3 0.3 0.2

Financial account 0.2 -2.7 -19.5 -7.4 -12.1 -6.2 -10.1 -6.0
Foreign direct investment (net) 1.4 -0.6 -1.1 0.0 4.0 4.0 4.9 5.0
Portfolio investment (net) -0.9 -0.2 1.1 3.4 0.9 1.2 1.4 1.8
Financial derivatives (net) 0.1 0.4 -0.1 -0.1 0.1 0.2 0.4 0.7
Other investments (net) -0.4 -2.1 -19.3 -10.6 -17.1 -11.5 -16.8 -13.6
Public sector (net) 6.6 6.1 0.0 -6.3 -7.4 -5.1 -7.8 -5.6
Disbursements 8.3 8.9 7.9 2.7 1.9 1.7 1.3 0.8
Of which: Budget support 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Amortization due -1.7 -2.8 -7.9 -9.0 -9.3 -6.8 -9.1 -6.4
Monetary Authorities (SDR Allocation) 0.0 0.0 0.0 6.3 0.0 0.0 0.0 0.0
Commercial banks (net) -0.5 1.3 -2.3 -1.0 -0.6 0.1 0.2 0.5
Other sectors -6.5 -9.5 -17.1 -9.6 -9.1 -6.4 -9.2 -8.5

Errors and omissions -0.9 0.3 -1.6 -2.9 0.0 0.0 0.0 0.0

Overall balance -1.7 -0.6 -8.6 -2.4 -10.4 -5.6 -7.4 -3.1

Financing 1.7 0.3 1.3 -7.9 -1.0 -2.8 -3.2 -4.4

Central bank net reserves (- increase) 1.7 0.3 1.3 -7.9 -1.0 -2.8 -3.2 -4.4
Exceptional financing 0.0 0.3 7.3 10.2 10.7 7.0 9.3 6.3

Financing gap 0.0 0.3 7.3 10.2 11.4 8.3 10.6 7.5

Memorandum items:
Current account (percent of GDP) -1.3 1.4 12.0 7.6 1.4 0.3 2.5 2.7
Total official grants (percent of GDP) 0.3 0.4 0.4 0.4 0.3 0.3 0.3 0.2
Change in copper export volume (percent) 2.8 -18.5 14.4 -5.7 6.7 6.6 6.5 6.5
Copper export price (U.S. dollars per tonne) 6,530 6,010 6,175 9,317 9,595 9,374 9,342 9,310
Crude oil price 68 61 41 69 106 95 84 77
Gross international reserves (millions of U.S. dollars) 1,569 1,450 1,203 2,796 3,060 3,841 4,814 6,237
In months of prospective imports 2.4 3.0 1.9 3.2 3.3 3.9 4.6 5.5
Sources: Zambian authorities; and IMF staff estimates and projections.

34 INTERNATIONAL MONETARY FUND

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Table 3a. Zambia: Fiscal Operations of the Budgetary Central Government, 2018–25
(Millions of Kwacha)
2018 2019 2020 2021 2022 2023 2024 2025
Budget Proj. Projections
Revenue 53,450 61,331 67,437 98,945 100,681 101,231 119,221 135,396 152,151
Revenue excluding grants 52,802 60,492 65,722 96,463 98,859 99,556 117,417 133,468 150,088
Revenue excluding grants adjusted by the backlog of VAT refunds 49,227 58,977 64,163 94,547 n.a. 101,629 119,491 135,542 152,161
Tax 44,240 48,412 52,182 71,151 77,901 78,971 94,160 107,142 120,816
Taxes on incomes 14,333 16,243 19,831 22,815 25,882 25,974 29,223 33,144 36,201
Taxes on profits 5,973 7,537 9,513 19,242 16,394 21,805 21,589 24,563 28,207
Mining 2,451 3,231 5,300 12,702 10,928 14,503 13,945 16,024 18,275
Non-mining 3,522 4,305 4,213 6,540 5,466 7,302 7,644 8,539 9,933
Value-added tax 17,352 16,835 14,639 19,516 22,952 19,650 29,038 33,531 38,029
Excise taxes 3,438 3,990 4,661 4,327 6,184 5,222 6,926 7,857 9,452
Taxes on international trade 3,144 3,808 3,538 5,250 6,489 6,319 7,384 8,047 8,928
Other revenue, including mineral royalties1 8,563 12,080 13,540 25,312 20,958 20,585 23,257 26,326 29,272
Of which: Mineral royalties 3,937 4,269 5,241 12,417 12,839 12,187 13,776 16,235 18,007
Grants 647 839 1,715 2,481 1,822 1,675 1,804 1,927 2,063

Expenditure 76,313 89,595 113,227 134,929 132,126 145,800 157,320 172,927 184,657
Expense 52,684 61,268 87,478 117,477 117,453 131,466 141,524 155,079 164,284
Compensation of employees 21,856 22,982 26,881 31,881 37,823 37,715 46,419 53,365 57,180
Use of goods and services 7,944 4,460 10,330 15,094 10,551 15,828 17,403 19,503 22,433
Interest 13,103 20,762 19,762 26,910 37,819 36,036 37,960 41,524 41,688
Domestic 7,529 11,755 14,525 24,929 27,365 27,992 30,217 34,400 35,347
Foreign 5,574 9,006 5,237 1,980 10,454 8,044 7,743 7,124 6,340
Subsidies 3,136 7,342 18,368 24,345 8,533 17,827 13,530 12,188 10,522
Of which: Agricultural (FISP and FRA) 3,136 5,907 11,748 11,845 6,333 12,615 11,986 10,546 8,778
Of which: Energy (fuel and electricity) 0 1,434 5,099 10,610 1,850 4,841 1,135 1,185 1,234
Intergovernmental transfers 5,631 5,279 7,487 8,799 13,151 13,038 13,849 14,944 16,550
Social protection 1,015 306 2,468 5,538 6,267 6,313 7,577 8,735 10,441
Other 0 137 2,183 4,911 3,310 4,708 4,786 4,820 5,470
Net acquisition of nonfinancial assets 23,629 28,327 25,749 17,451 14,672 14,334 15,796 17,848 20,373
Of which: Domestically-financed 5,275 3,153 4,901 9,296 6,173 7,555 9,556 10,449 14,615
Of which: Foreign-financed 18,354 25,174 20,848 8,155 8,500 6,779 6,240 7,399 5,758

Net lending/borrowing (overall balance, cash basis) -22,863 -28,264 -45,789 -35,984 -31,445 -44,569 -38,099 -37,531 -32,507
Primary balance (cash basis) -9,761 -7,502 -26,027 -9,074 6,374 -8,533 -139 3,993 9,181

Expenditure arrears (- payments) 5,729 11,721 6,008 14,533 n.a. -9,583 -9,743 -9,840 -9,935
Backlog of VAT refunds (flow) 3,575 1,515 1,558 1,916 n.a. -2,074 -2,074 -2,074 -2,074
Arrears on external interest (flow) 0 127 4,327 8,922 n.a. 0 0 0 0

2
Overall balance, (commitment basis) -32,167 -41,627 -57,682 -61,355 n.a. -32,912 -26,282 -25,617 -20,499
2
Primary balance (commitment basis) -19,064 -20,738 -33,594 -25,523 n.a. 3,124 11,678 15,907 21,189

Financing 22,863 28,264 45,789 35,984 31,445 44,569 38,099 37,531 32,507
Net acquisition of financial assets -2,281 153 816 2,674 0 0 0 0 0
Domestic -2,281 153 816 2,674 0 0 0 0 0
Foreign 0 0 0 0 0 0 0 0 0
Net incurrence of liabilities 21,059 28,867 47,315 39,173 -7,903 -4,606 2,417 -16,640 -8,481
Domestic 7,879 10,424 31,747 33,655 24,459 11,121 12,792 15,140 20,411
Foreign 13,179 18,443 15,568 5,518 -32,362 -15,727 -10,376 -31,781 -28,892
Loans 13,179 18,443 15,568 5,518 -32,362 -15,727 -10,376 -31,781 -28,892
Budget support, gross 0 0 0 0 0 0 0 0 0
Project loans, gross 17,873 25,174 20,753 8,155 8,500 9,000 8,911 7,574 5,471
Other, gross 0 0 0 0 0 12,339 6,043 6,146 0
Amortization -4,694 -6,731 -5,184 -2,637 -40,861 -37,067 -25,330 -45,501 -34,363
Debt securities 0 0 0 0 0 0 0 0 0
Statistical discrepancy / financing gap -476 -450 -709 -515 39,347 49,175 35,682 54,172 40,988

Memorandum items:
Primary expenditure (commitment basis) 68,939 80,554 99,472 122,552 n.a. 100,181 109,617 121,563 133,035
Net domestic financing 10,160 10,271 30,930 30,981 24,459 11,121 12,792 15,140 20,411
2
Primary balance excluding mining revenues (commitment basis) -25,452 -28,239 -44,134 -50,643 n.a. -23,566 -16,044 -16,353 -15,092
Backlog of VAT refunds (stock) 5,378 6,893 8,451 10,368 n.a. 8,294 6,221 4,147 2,074
Stock of expenditure arrears 24,777 36,498 42,506 57,039 n.a. 49,559 40,651 31,529 22,199
Sources: Zambian authorities; and IMF staff estimates and projections.
1
The large increase in 2021 is due to a dividend paid by the Bank of Zambia to the budget.
2
Adjusted for the accumulation/clearance of arrears on VAT refund claims and expenditure arrears.

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Table 3b. Fiscal Operations of the Budgetary Central Government, 2018–25 (Percent of GDP)
2018 2019 2020 2021 2022 2023 2024 2025
Budget Proj. Projections
Revenue 19.4 20.4 20.3 23.3 21.6 21.4 22.3 22.7 22.8
Revenue excluding grants 19.2 20.1 19.8 22.7 21.2 21.0 21.9 22.3 22.5
Revenue excluding grants adjusted by the backlog of VAT refunds 17.9 19.6 19.3 22.3 n.a. 21.4 22.3 22.7 22.8
Tax 16.1 16.1 15.7 16.8 16.7 16.7 17.6 17.9 18.1
Taxes on incomes 5.2 5.4 6.0 5.4 5.6 5.5 5.5 5.5 5.4
Taxes on profits 2.2 2.5 2.9 4.5 3.5 4.6 4.0 4.1 4.2
Mining 0.9 1.1 1.6 3.0 2.3 3.1 2.6 2.7 2.7
Non-mining 1.3 1.4 1.3 1.5 1.2 1.5 1.4 1.4 1.5
Value-added tax 6.3 5.6 4.4 4.6 4.9 4.1 5.4 5.6 5.7
Excise taxes 1.2 1.3 1.4 1.0 1.3 1.1 1.3 1.3 1.4
Taxes on international trade 1.1 1.3 1.1 1.2 1.4 1.3 1.4 1.3 1.3
1
Other revenue, including mineral royalties 3.1 4.0 4.1 6.0 4.5 4.3 4.3 4.4 4.4
Of which: Mineral royalties 1.4 1.4 1.6 2.9 2.8 2.6 2.6 2.7 2.7
Grants 0.2 0.3 0.5 0.6 0.4 0.4 0.3 0.3 0.3

Expenditure 27.7 29.8 34.1 31.8 28.3 30.8 29.4 28.9 27.7
Expense 19.1 20.4 26.3 27.7 25.2 27.7 26.5 25.9 24.6
Compensation of employees 7.9 7.6 8.1 7.5 8.1 8.0 8.7 8.9 8.6
Use of goods and services 2.9 1.5 3.1 3.6 2.3 3.3 3.3 3.3 3.4
Interest 4.8 6.9 5.9 6.3 8.1 7.6 7.1 6.9 6.2
Domestic 2.7 3.9 4.4 5.9 5.9 5.9 5.6 5.8 5.3
Foreign 2.0 3.0 1.6 0.5 2.2 1.7 1.4 1.2 1.0
Subsidies 1.1 2.4 5.5 5.7 1.8 3.8 2.5 2.0 1.6
Of which: Agricultural (FISP and FRA) 1.1 2.0 3.5 2.8 1.4 2.7 2.2 1.8 1.3
Of which: Energy (fuel and electricity) 0.0 0.5 1.5 2.5 0.4 1.0 0.2 0.2 0.2
Intergovernmental transfers 2.0 1.8 2.3 2.1 2.8 2.8 2.6 2.5 2.5
Social protection 0.4 0.1 0.7 1.3 1.3 1.3 1.4 1.5 1.6
Other 0.0 0.0 0.7 1.2 0.7 1.0 0.9 0.8 0.8
Net acquisition of nonfinancial assets 8.6 9.4 7.8 4.1 3.1 3.0 3.0 3.0 3.1
Of which: Domestically-financed 1.9 1.0 1.5 2.2 1.3 1.6 1.8 1.7 2.2
Of which: Foreign-financed 6.7 8.4 6.3 1.9 1.8 1.4 1.2 1.2 0.9

Net lending/borrowing (overall balance, cash basis) -8.3 -9.4 -13.8 -8.5 -6.7 -9.4 -7.1 -6.3 -4.9
Primary balance (cash basis) -3.5 -2.5 -7.8 -2.1 1.4 -1.8 0.0 0.7 1.4

Expenditure arrears (- payments) 2.1 3.9 1.8 3.4 n.a. -2.0 -1.8 -1.6 -1.5
Backlog of VAT refunds (flow) 1.3 0.5 0.5 0.5 n.a. -0.4 -0.4 -0.3 -0.3
Arrears on external interest (flow) 0.0 0.0 1.3 2.1 n.a. 0.0 0.0 0.0 0.0

2
Overall balance, (commitment basis) -11.7 -13.9 -17.4 -14.5 n.a. -6.9 -4.9 -4.3 -3.1
2
Primary balance (commitment basis) -6.9 -6.9 -10.1 -6.0 n.a. 0.7 2.2 2.7 3.2

Financing 8.3 9.4 13.8 8.5 6.7 9.4 7.1 6.3 4.9
Net acquisition of financial assets -0.8 0.1 0.2 0.6 0.0 0.0 0.0 0.0 0.0
Domestic -0.8 0.1 0.2 0.6 0.0 0.0 0.0 0.0 0.0
Foreign 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net incurrence of liabilities 7.7 9.6 14.2 9.2 -1.7 -1.0 0.5 -2.8 -1.3
Domestic 2.9 3.5 9.6 7.9 5.2 2.3 2.4 2.5 3.1
Foreign 4.8 6.1 4.7 1.3 -6.9 -3.3 -1.9 -5.3 -4.3
Loans 4.8 6.1 4.7 1.3 -6.9 -3.3 -1.9 -5.3 -4.3
Budget support, gross 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Project loans, gross 6.5 8.4 6.2 1.9 1.8 1.9 1.7 1.3 0.8
Other, gross 0.0 0.0 0.0 0.0 0.0 2.6 1.1 1.0 0.0
Amortization -1.7 -2.2 -1.6 -0.6 -8.8 -7.8 -4.7 -7.6 -5.2
Debt securities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Statistical discrepancy / financing gap -0.2 -0.1 -0.2 -0.1 8.4 10.4 6.7 9.1 6.1

Memorandum items:
Primary expenditure (commitment basis) 25.1 26.8 29.9 28.9 n.a. 21.1 20.5 20.3 19.9
Net domestic financing 3.7 3.4 9.3 7.3 5.2 2.3 2.4 2.5 3.1
Primary balance excluding mining revenues (commitment basis)2 -9.2 -9.4 -13.3 -11.9 n.a. -5.0 -3.0 -2.7 -2.3
Backlog of VAT refunds (stock) 2.0 2.3 2.5 2.4 n.a. 1.8 1.2 0.7 0.3
Stock of expenditure arrears 9.0 12.1 12.8 13.4 n.a. 10.5 7.6 5.3 3.3
Nominal GDP (millions of kwacha) 275,175 300,449 332,223 424,453 466,179 473,917 535,028 597,667 667,213
Sources: Zambian authorities; and IMF staff estimates and projections.
1
The large increase in 2021 is due to a dividend paid by the Bank of Zambia to the budget.
2
Adjusted for the accumulation/clearance of arrears on VAT refund claims and expenditure arrears.

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Table 4. Zambia: Monetary Accounts, 2018–25

(Millions of Kwacha, unless otherwise indicated)
2018 2019 2020 2021 2022 2023 2024 2025
Projections
Depository corporations survey

Net foreign assets 24,810 24,248 38,980 37,624 42,089 45,771 49,179 58,922

Net domestic assets 38,187 46,652 64,848 70,002 77,407 88,138 99,151 101,503
Domestic claims 62,219 73,134 102,655 103,414 113,127 121,743 130,125 140,937
Net claims on central government 28,998 34,461 60,446 64,641 68,387 70,584 71,719 74,328
Claims on other sectors 33,222 38,673 42,209 38,773 44,740 51,160 58,406 66,609
Claims on other financial corporations 549 221 168 189 227 273 363 363
Claims on state and local government 67 83 51 41 59 87 118 125
Claims on public non-financial corporations 489 725 1,148 871 871 871 871 871
Claims on private sector 32,117 37,644 40,842 37,672 43,583 49,930 57,055 65,250
Other items net -24,032 -26,482 -37,806 -33,412 -35,720 -33,605 -35,485 -39,433

Broad money (M3) 62,997 70,900 103,829 107,626 119,496 133,909 148,330 160,426

Central bank survey

Net foreign assets 10,256 11,197 10,921 12,127 14,980 19,471 30,625 50,000
Asset 18,827 20,641 26,230 47,101 55,202 69,126 90,315 120,291
Liabilities -8,571 -9,444 -15,309 -34,974 -40,222 -49,655 -59,690 -70,290

Net domestic assets 3,299 5,854 15,856 16,939 18,345 19,774 12,845 948
Net domestic claims 13,327 17,047 33,862 28,710 34,824 36,418 30,322 20,171
Net claims on other depository corporations 30 271 5,383 6,984 11,199 12,419 5,858 -4,827
Net claims on central government 13,204 16,678 28,389 21,631 23,497 23,811 24,190 24,725
Claims on other sectors 94 98 90 95 128 187 274 274
Other items (net) -10,028 -11,193 -18,007 -11,771 -16,479 -16,644 -17,476 -19,224

Reserve money 13,555 17,051 26,777 29,066 33,325 39,244 43,471 50,948
Currency outside banks and cash in vaults 8,292 8,622 12,389 13,550 19,411 24,648 32,823 35,644
Other depository corporation reserves 5,207 8,361 14,304 15,426 13,816 14,486 15,036 15,171
Liabilities to other sectors 56 68 84 90 97 111 123 133

Memorandum items:
Reserve money (end-of-period, annual percentage change) -0.6 25.8 57.0 8.5 14.7 17.8 10.8 17.2
Broad money (M3) (annual percentage change) 16.5 12.5 46.4 3.7 11.0 12.1 10.8 8.2
Credit to the private sector (annual percentage change) 16.7 17.2 8.5 -7.8 15.7 14.6 14.3 14.4
Velocity (nominal GDP/M3) 4.4 4.2 3.2 3.9 4.0 4.0 4.0 4.2
Money multiplier (M3/reserve money) 4.6 4.2 3.9 3.7 3.6 3.4 3.4 3.1
Credit to the private sector (percent of GDP) 11.7 12.5 12.3 8.9 9.2 9.3 9.5 9.8
Gross foreign exchange reserves of the
Bank of Zambia (millions of U.S. dollars) 1,569 1,450 1,203 2,796 3,060 3,841 4,814 6,237
Exchange rate (kwacha per U.S. dollar, end period) 11.9 14.1 21.2 16.7 … … … …
Nominal GDP (million kwacha) 275,175 300,449 332,223 424,453 473,917 535,028 597,667 667,213
Sources: Zambian authorities; and IMF staff estimates and projections.

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Table 5. Zambia: Financial Soundness Indicators, 2013–22

(Percent, unless otherwise indicated)
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Mar Junl Sep Dec Mar

Capital adequacy
Regulatory capital to risk-weighted assets 26.8 27.0 21.0 26.2 26.5 22.1 22.2 20.1 19.7 19.2 22.8 24.7 25.0
Tier 1 regulatory capital to risk-weighted assets 24.5 24.6 19.2 23.4 24.5 20.1 20.1 17.8 17.3 17.0 21.2 23.3 23.8
Capital to total assets 14.1 15.1 12.2 13.5 12.6 12.3 12.2 8.4 8.3 8.7 10.3 10.9 11.0

Asset quality
Past due advances (NPL) to total advances 7.0 6.1 7.3 9.7 12.0 11.0 8.9 11.6 11.4 9.1 6.9 5.8 6.4
Loan loss provisions to nonperforming loans 83.2 76.5 70.5 71.5 69.2 86.4 91.6 75.9 75.3 77.9 92.3 102.8 93.8
Bad debt provisions to advances 5.8 3.9 4.6 5.6 8.0 9.5 8.2 8.8 8.6 7.1 6.3 6.0 6.0

Loan concentration
Of Which
Households 34.5 36.0 30.2 28.7 28.8 29.0 25.6 20.4 19.9 17.0 18.3 18.8 19.8
Government and parastatals 2.1 4.3 3.0 4.8 5.4 7.5 11.0 20.0 25.7 27.6 29.0 30.1 28.1
Sectoral Breakdown
Agriculture 20.2 16.6 17.3 17.0 20.3 16.8 16.3 16.3 13.7 14.7 13.1 10.7 11.0
Mining 6.6 5.0 6.4 6.3 7.5 7.1 7.5 6.2 5.0 4.8 4.6 4.0 4.7
Manufacturing 9.5 11.5 13.5 12.8 8.2 9.2 9.0 1.7 1.6 1.4 1.0 1.3 11.1
Construction 3.5 3.4 3.4 3.9 3.7 3.0 2.1 1.7 1.6 1.4 1.0 1.3 1.5
Services 4.1 2.5 2.7 1.8 2.4 4.2 2.1 1.9 3.8 3.5 3.8 1.3 0.9
Others 56.1 61.0 56.7 58.2 58.1 59.8 63.0 72.1 74.4 74.2 67.3 72.5 70.9

Earnings and profitability

Return on average assets 3.2 3.7 2.8 2.5 3.1 3.0 3.3 2.1 2.9 3.7 5.2 5.2 5.1
Return on equity 18.2 17.3 13.1 12.3 15.4 14.7 16.2 12.9 19.8 27.5 38.4 35.1 32.8
Gross interest income to total gross income 64.5 66.4 67.1 68.6 69.0 67.9 72.7 72.6 72.2 72.1 72.1 71.9 76.4
Gross noninterest income to total gross income 35.5 33.7 32.9 31.4 31.0 32.1 27.3 27.4 27.8 27.9 27.9 28.1 23.6
Net interest margin 8.3 8.5 8.2 8.7 9.1 9.1 9.3 9.4 9.4 9.3 9.7 9.9 10.1

Liquidity
Liquid assets to total assets 38.9 35.8 34.8 39.1 45.5 47.0 42.2 48.6 49.7 48.3 43.6 46.6 46.8
Liquid assets to total deposits 52.6 49.8 47.9 54.2 56.5 57.0 51.5 57.4 58.5 57.3 52.7 56.3 56.9
Advances to deposits ratio 61.4 62.0 56.4 50.0 45.2 47.3 51.5 41.0 39.7 40.7 42.2 39.4 37.1

Exposure to foreign currency

Foreign currency loans to total gross loans 25.6 29.0 36.9 35.7 41.6 44.5 50.3 47.1 43.8 44.6 34.3 33.7 39.8
Foreign currency liabilities to total liabilities 30.4 32.1 48.9 45.0 44.0 46.6 47.4 52.2 53.9 56.4 43.1 41.9 44.1
Net open position in foreign exchange to capital 3.6 1.6 4.7 0.8 1.4 1.7 1.3 1.1 2.3 0.8 1.4 0.2 0.1

Source: Bank of Zambia.

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Table 6. Zambia: External Financing Needs and Sources, 2018–25

(Millions of U.S. dollars, unless otherwise indicated)
2018 2019 2020 2021 2022 2023 2024 2025
I. Total requirement 2,555 2,030 2,412 6,251 5,164 4,541 5,759 5,222
Current Account Deficit, excluding Official Transfers 341 -325 -2,181 -1,616 -371 -85 -759 -858
Debt Amortization 921 1,051 1,922 2,497 3,248 2,679 3,553 2,953
Gross Reserves Accumulation, incl SDR allocation -506 -119 -248 1,668 265 781 973 1,422
Repayments to the Fund 0 44 15 3 0 0 0 0
Other Capital Flows 1/ 1,798 1,379 2,903 3,699 2,022 1,166 1,991 1,704

II. Total sources 2,554 2,122 1,620 2,841 2,095 2,195 2,567 2,792
Official Transfers (Current and Capital) 66 97 80 77 88 83 80 77
BoZ Liabilities, incl. SDR allocation 0 0 0 1,328 0 0 0 0
Foreign Direct Investment, net 363 -148 -208 -3 1,075 1,113 1,476 1,628
Loan Disbursements to Private Sector 174 154 130 152 193 202 216 231
Loan Disbursements to Public Sector 2,189 2,073 1,424 571 511 469 382 265
Portfolio Investment, net 2/ -238 -53 194 717 229 329 414 591

III. Financing gap (I-II) 1 -92 792 3,410 3,068 2,346 3,192 2,430

IV. Expected sources of financing 0 61 1,322 2,172 3,068 2,346 3,192 2,430
Donor Support (WB/AfDB) 0 0 0 0 547 282 247 204
Exceptional Financing (Restructuring) 0 61 1,322 2,172 2,331 1,682 2,559 1,838
IMF ECF Arrangement 0 190 382 386 388

Memo Item
Gross International Reserves (GIR), total 1,569 1,450 1,203 2,796 3,060 3,841 4,814 6,237
o/w unencumbered reserves 1,392 1,248 812 1,000 1,175 1,862 2,736 4,054
Financing Gap (percent of GDP) 0 0 4 16 11 8 11 8
In months of perspective imports 2.4 3.0 1.9 3.2 3.3 3.9 4.6 5.5
o/w unencumbered reserves 2.1 2.6 1.3 1.1 1.3 1.9 2.6 3.6
1/ Includes financial derivatives, other assets, errors and omissions.
2/ Exceptional financing from commercial creditors for May 1 to Dec 31, 2020 is $674 million.

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ZAMBIA

Table 7. Zambia: Schedule of Reviews and Disbursements1

In Percent of
Availability Date Millions of SDR Quota Conditions
August 31, 2022 139.88 14.3 Board approval of arrangement

April 1, 2023 139.88 14.3 Observance of end-December 2022 and continuous

performance criteria and completion of first review

October 1, 2023 139.88 14.3 Observance of end-June 2023 and continuous

performance criteria and completion of second review

April 1, 2024 139.88 14.3 Observance of end-December 2023 and continuous

performance criteria and completion of third review

October 1, 2024 139.88 14.3 Observance of end-June 2024 and continuous

performance criteria and completion of fourth review

April 1, 2025 139.88 14.3 Observance of end-December 2024 and continuous

performance criteria and completion of fifth review

October 1, 2025 138.92 14.2 Observance of end-June 2025 and continuous

performance criteria and completion of sixth review

Total 978.20 100.0

1
Zambia's IMF quota is SDR 978.2 million.

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Table 8. Zambia: Indicators of Capacity to Repay the Fund, 2022–32

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

Fund obligations based on existing credit (millions of SDRs)

Principal 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Charges and interest 1.5 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4

Fund obligations based on existing and prospective credit (millions of SDRs)

Principal 0.0 0.0 0.0 0.0 0.0 0.0 42.0 97.9 153.9 195.6 195.6
Charges and interest 1.5 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4 3.4

Total obligations based on existing and prospective credit

Millions of SDRs 3.0 6.8 6.8 6.8 6.8 6.8 48.7 104.7 160.6 202.4 202.4
Millions of U.S. dollars 4.1 9.2 9.4 9.4 9.5 9.5 68.5 147.2 225.9 284.6 284.7
Percent of exports of goods and services 0.0 0.1 0.1 0.1 0.1 0.1 0.4 0.7 1.0 1.2 1.1
Percent of debt service 0.1 0.3 0.2 0.3 0.3 0.4 3.2 7.0 10.3 9.7 13.3
Percent of quota 0.3 0.7 0.7 0.7 0.7 0.7 5.0 10.7 16.4 20.7 20.7
Percent of gross international reserves 0.1 0.2 0.2 0.2 0.1 0.1 0.7 1.5 2.1 2.5 2.1
percent of GDP 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.3 0.5 0.6 0.5

Outstanding Fund credit based on existing and prospective credit

Millions of SDRs 139.9 419.6 699.4 978.2 978.2 978.2 936.2 838.3 684.5 488.8 293.2
Millions of U.S. dollars 189.5 575.8 968.7 1364.1 1372.1 1378.6 1319.5 1181.5 964.6 688.9 413.2
Percent of exports of goods and services 1.5 4.5 7.1 9.4 8.7 7.9 7.0 5.8 4.4 2.9 1.6
Percent of debt service 5.5 19.5 25.7 42.8 39.3 53.5 61.4 56.5 43.9 23.5 19.3
Percent of quota 14.3 42.9 71.5 100.0 100.0 100.0 95.7 85.7 70.0 50.0 30.0
Percent of gross international reserves 6.2 15.1 20.2 22.0 17.2 16.0 14.2 11.8 9.0 6.0 3.0
percent of GDP 0.7 2.0 3.2 4.2 3.9 3.7 3.3 2.7 2.1 1.4 0.8

Memorandum items:
Exports of goods and services (millions of U.S. dollars) 12,475 12,812 13,625 14,540 15,817 17,469 18,841 20,324 21,856 23,537 25,273
External Debt service (millions of U.S. dollars)1 3,459 2,956 3,763 3,189 3,491 2,577 2,148 2,091 2,200 2,929 2,144
Gross international reserves (millions of U.S. dollars) 3,048 3,823 4,790 6,205 7,965 8,600 9,286 10,025 10,756 11,540 13,715
Quota (millions of SDRs) 978.2 978.2 978.2 978.2 978.2 978.2 978.2 978.2 978.2 978.2 978.2
Nominal GDP (millions of U.S. dollars) 26,885 28,153 30,124 32,304 34,739 37,382 40,303 43,458 46,807 50,361 54,137

Sources: IMF staff estimates and projections.

1
Total debt service includes IMF repayments.

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Annex I. Risk Assessment Matrix 1

Relative
Source of Risk Impact if Realized Policy Response
Likelihood
Domestic Risks
Outbreaks of lethal and M H. Growth could decelerate The government should step up support
highly contagious and public financing needs for the health system and adopt
COVID-19 variants. could increase sharply, measures to contain the spread of the
Rapidly increasing further undermining debt pandemic while limiting its impact on
hospitalizations and deaths sustainability. Financial the economy. The BoZ should closely
due to low vaccine sector stress could increase. monitor growing stress in the financial
protection or vaccine- system.
resistant variants force
more social distancing
and/or new lockdowns.
Natural disasters related to M H. Adverse impact on the Provide effective support to vulnerable
climate change. Higher agriculture sector and on populations. Diversify food crops away
frequency of natural the poor, through higher from maize to crop varieties that are
disasters causes severe food prices, reduced maize better aligned to shortened rainy
economic damage to smaller exports, higher spending on seasons. Consider medium-term
vulnerable economies and social safety nets and on strategies such as building reservoir
accelerate emigration. subsidies for agricultural dams to help regulate water flow to
inputs, negative impact on main dams during high or low rain
hydropower generation, periods.
downward pressures on
growth.
Widespread social H M. Further increases in fuel Take measures to strengthen
discontent and political and electricity prices may governance and anti-corruption
instability. Social unrest lead to social unrest. This frameworks. Implement orderly fiscal
fueled by increasing prices, could slow down much adjustment, notably by increasing
rising inequality, inadequate needed reforms and dent domestic revenue and reducing capital
healthcare triggers political investor confidence. expenditures and reforming subsidies
instability, capital outflows, for agricultural inputs. Use some of the
higher unemployment, and fiscal space to boost spending on social
slower economic growth. assistance. Improve the efficiency in fuel
procurement.
Financial instability caused H M. Deteriorating bank Closely monitor the buildup of
by a rise in non-performing balance sheets could lead vulnerabilities on financial sector
loans. to a contraction in credit to balance sheets and implement swift and
the private sector and decisive prudential corrective actions if
dampen economic activity. required.

1
Based on the April 2022 update of the Global Risk Assessment Matrix.

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Relative
Source of Risk Impact if Realized Policy Response
Likelihood
External Risks
Russia’s invasion of H H. Expensive fertilizer could Accelerate reforms enhancing export
Ukraine leads to negatively affects the competitiveness. Diversify the economy
escalation of sanctions budget or agricultural to build resilience against external
and other disruptions. productivity. Lower global shocks. Enhance regional integration,
This leads to lower global growth could reduce including through existing SADC and
growth and rising and demand for Zambia’s AfCFTA protocols. Maintain exchange
volatile food and energy exports, notably copper and rate flexibility.
tourism, leading to a loss of
prices.
reserves and increased
pressure on the kwacha.
Negative impact on debt
sustainability.
Abrupt growth slowdown M H. Declines in tax and Accelerate reforms enhancing export
in China. A combination of export revenues could lead competitiveness. Diversify the economy
extended COVID-19 to fiscal and exchange rate to build resilience against external
lockdowns, rising pressures. shocks.
geopolitical tensions, a
sharper-than-expected
slowdown in the property
sector, and/or inadequate
policy responses result in a
sharp slowdown of
economic activity, leading
to low and volatile copper
prices.
Financing risks driven by M H. Continued accumulation Implement credible fiscal adjustment
slow progress in debt of domestic arrears would measures. Broaden the tax base to
restructuring negotiations increase stress on the increase domestic fiscal revenues.
or exit of non-resident financial sector through Consolidate capital expenditures by
investors from domestic higher NPLs and hamper prioritizing infrastructure projects and
debt market. private sector activity. postponing those with a smaller growth
Domestic refinancing risks impact and those not aligned with
for government securities development priorities. Reduce the
would increase. Uncertainty public sector wage bill by restricting
over VAT refund claims new hires to priority sectors only. Stand
could hurt revenue ready to tighten monetary policy as
collection and exacerbate appropriate.
the fiscal deficit, while
weakening incentives for
new investment. Exiting
non-resident investors from
the government domestic
securities market would
adversely impact reserves
and exert pressure on the
exchange rate. Significant
downward pressures on
growth.

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Annex II. External Sector Assessment

Overall Assessment: Zambia’s external position in 2021 was weaker than the level implied by
fundamentals and desirable policies. This is evident in the country’s unsustainable external debt, inadequate
level of FX reserves, and very weak net international investment position.

Potential Policy Responses: Restoring external sustainability will require adjustment policies in line with
the ECF-supported program to set the foundations for a strong recovery and re-position the economy on a
sustainable growth path. This should include upfront and sustained fiscal adjustment, including a shift in
spending away from wasteful subsidies and towards social spending. Structural reforms should focus on
addressing inefficiencies in the energy and agricultural input markets, enhancing governance and reducing
corruption risks, shoring up social safety nets, as well as boosting and diversifying exports. The authorities
should continue to closely monitor the risks of a potentially disorderly reversal of recent portfolio inflows
and stand ready to deploy counter measures. However, restoring sustainability will also require actions to
address the external debt overhang through a comprehensive restructuring as requested by the authorities
under the G20 Common Framework.

Foreign Assets and Liabilities: Position and Trajectory

Background. Zambia’s net international investment position (NIIP) has deteriorated significantly to -142
percent of GDP at end-December 2021, compared to -110 percent of GDP at end-2018, mainly driven by
high levels of government borrowing and a sharp currency depreciation. 1,2 Zambia’s foreign assets stood
at 32 percent of GDP, mostly in the form of currency and deposits held abroad by non-financial
corporates (NFCs) and commercial banks as well as reserve assets held by the Bank of Zambia (BoZ).
Gross liabilities at end-December 2021 were five times higher than assets, at 174 percent of GDP, with
FDI and public debt liabilities accounting for the lion’s share.

Assessment. Zambia’s large negative NIIP poses a significant risk to external sustainability and points to
the urgent need for adjustment and external public debt reduction. Policy reforms planned under the
ECF-supported program, along with the expected debt restructuring, should help significantly reduce IIP
liabilities and boost reserve assets over the medium term, with a consequent expected improvement in
the NIIP. As discussed in the 2019 Article IV, stabilizing at a stronger NIIP would be more appropriate.
Specifically, actions to bring the NIIP down to around -58 percent of GDP—the median NIIP among LICs
in 2021 and the average for Zambia over 2011-14 before it began deteriorating sharply—would seem
appropriate.
End-2021 NIIP: Gross Assets: Debt Assets: Gross Liabilities: Debt Liabilities:
(% GDP) -142 32 21 174 127

_____________________________________
1
All NIIP figures in this note are based on Bank of Zambia statistics. Significant technical assistance is being
provided to strengthen BOP and IIP statistics in Zambia.
2
The Zambian kwacha has recovered some of its value against the dollar in the second half of 2021 but
remains weaker than its pre-2020 level, implying a large net impact of recent currency movements on NIIP.

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Current Account
Background. The current account (CA) surplus shrank in 2021—from 12 percent of GDP in 2020—to 7.6
percent of GDP (Annex Figure 1). The lower 2021 surplus is mostly a product of the strong rebound in
imports from the COVID-related compression in 2020 and, to a lesser extent, higher reinvested earnings.
However, both 2020 and 2021 outcomes stand in stark contrast to the current account trends of 2015-19,
reflecting the pronounced increase in copper prices, bringing them close to all-time highs. The increase
in copper prices is expected to be sustained over the medium term. This, combined with the projected
increase in production to record levels in coming years, is expected to keep the current account
structurally in surplus over the medium term.
Despite the large surpluses of 2020 and 2021, BoZ gross reserves—excluding the recent one-off SDR
allocation—declined from $1.45 billion to $1.29 billion between January 2020 and December 2021. This
divergence between current account and reserve trends is a long-standing feature of Zambia’s balance of
payments (BOP) and, according to BoZ statistics, is a result of large outflows in the financial account in
the form of sizable private sector assets abroad. Better understanding the nature of these flows is the
focus of ongoing work by Zambian authorities, with IMF support.

Assessment. The disconnect among Zambia’s current account trends, the overall external stock position,
and reserves accumulation complicates any assessment of Zambia’s external position based on the
current account alone. Indeed, estimates based on the CA model (Annex Table 1) yield a CA gap of 0.5
percent of GDP, which is equivalent to an estimated real effective exchange rate (REER) gap of -1.8
percent. This suggests that Zambia’s external position in 2021 was broadly in line with the level implied
by fundamentals and desirable policies, which stands at odds with the country’s current situation of
external default, inadequate reserves, and large negative NIIP. This is despite an upward adjustment of
the CA norm—the expected CA balance given fundamentals and under optimal policies—by 7.2
percentage points of GDP to bring it into line with the estimated CA surplus necessary to reach the
targeted NIIP of -58 percent by 2025 (the end of the program period). 3
At the current juncture, with the weakness in the external stock position dominating the apparent
strength implied by the current account, staff assigns more weight in the overall assessment to the stock
indicators, such as reserves and the NIIP.
_______________________________________
3
This adjusted current account norm was computed under the assumption of an average nominal GDP growth rate of
12 percent (the expected average over the program period).

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Annex II. Table 1. Zambia: Model Estimates for 2021

(In Percent of GDP)

1/ Based on the EBA-lite 3.0 methodology

2/ Reflects the estimated impact of the pandemic on tourism
3/ Cyclically adjusted, including multilateral consistency adjustments

Real Exchange Rate

Background. Following a 25 percent depreciation in 2020, the average REER appreciated by 8 percent in
2021, driven by successive bouts of nominal appreciation of the Zambian kwacha over the second half of
2021. This sudden reversal was driven by a combination of confidence effects (from the election
outcome, SDR allocation, staff-level agreement on an IMF-supported program) and improved FX supply
(from higher copper receipts and portfolio inflows). While the recent kwacha appreciation is expected to
significantly attenuate inflation pressures (with a two-quarter lag), the expected impact on the current
account is likely to be limited, based on observed historical elasticities.
Assessment. The REER model in the EBA-lite methodology is based on a panel regression of the real
effective exchange rate which generates an estimated “norm” consistent with medium-term
fundamentals and desirable policies. Similar to the current account model estimates, it may not capture
well the structurally large outflows in Zambia’s financial account, nor the fact that Zambia is in external
debt default. Indeed, REER model estimates for 2021 suggest an REER gap of –4.1 percent and a
corresponding CA gap of 1.2 percent of GDP, which together imply that the exchange rate is under-
valued and the external position is stronger than fundamentals (Annex Table 1). Again, this appears
inconsistent with Zambia’s structurally weak external stock positions described above and is more likely a
reflection of the models’ inability to fully account for Zambia’s particular situation.

Capital and Financial Accounts: Flows and Policy Measures

Background. Capital and financial account transactions resulted in large net outflows both in 2020 and
2021, mainly reflecting sizable NFCs’ assets held abroad, per BoZ statistics (see above). These outflows
accounted for 42 percent of copper exports both in 2020 and 2021, more than offsetting the large influx
of portfolio inflows as foreign investors came into the domestic bond market—estimated at more than a
$1 billion over May-November 2021, of which about 60 percent went into bonds of 10-year or longer
maturities. Net FDI inflows remained depressed in 2021, with outflows broadly matching reported
inflows. The Zambian government accumulated about $1.8 billion in further debt service and payment

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arrears, which together with debt service benefiting from the G20 Debt Service Suspension Initiative,
were reflected under exceptional financing in 2021.
Capital and Financial Accounts: Flows and Policy Measures
Assessment. While generally positive, the sudden influx of portfolio flows also comes with the increased
risk of a disorderly exit should market sentiment change. The authorities should continue to carefully
monitor these risks, assess their implications, and prepare potential mitigation strategies, such as prudent
reserves management, close oversight of banks’ FX exposure, and a strengthening of micro- and
macroprudential policies, among others.

FX Intervention and Reserves Level

Background. While the BoZ closed 2021 with higher levels of gross reserves—$2.6 billion or 3.2 months
of prospective imports—this was mainly due to the one-off SDR allocation in August. Underlying gross
reserves excluding the SDR allocation barely increased from $1.2 billion to $1.3 billion over the course of
2021. As discussed above, this is despite the large current account surplus and is mainly a reflection of
leakages in the financial account in the form of large reported NFC foreign assets, per BoZ statistics. A
new regulation requiring the payment of mining taxes to be made in US dollars directly to the
government changed the dynamics in the FX market and has resulted in the central bank becoming the
dominant supplier of FX to the market. To help meet increased demand for FX in the face of constrained
supply, the BoZ has adopted a policy of systematically selling all copper tax proceeds into the market.
The BoZ also recently initiated purchases of gold from domestic mining companies, though the scope
and implication of such operations on reserves are currently unclear. The authorities have indicated their
intention to use the SDR allocation to help finance the budget over 2022-24, with a little over half
expected to be drawn in 2022 and the rest over 2023-2024.

Assessment. Zambia’s reserve position has improved, thanks to the one-off SDR allocation, but remains
below adequate levels. Zambia’s heavy reliance on copper exports and the need to protect against
current account shocks driven by volatility in copper prices suggests that a higher reserve buffer than
that implied by the three-month rule may be needed. Indeed, a cost-benefit analysis developed by Fund
staff for low-income countries suggests an optimal level of 5.5 months of prospective imports. Building
reserves to this level should be achievable over the course of the program, thanks to a combination of
planned fiscal adjustment, subsidy reform, successful debt restructuring, higher copper prices, and IMF
disbursements.

Annex II. Figure 2. Zambia: Copper Prices, Current Account and

Reserves

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Appendix I. Letter of Intent

August 8, 2022
Ms. Kristalina Georgieva
Managing Director
International Monetary Fund
700 19th Street NW
Washington, DC 20431
United States of America

Dear Ms. Georgieva,

1. The attached Memorandum of Economic and Financial Policies (MEFP) describes the
economic and social objectives and policies of the Government of the Republic of Zambia
from 2022 to 2025. Also attached is a Technical Memorandum of Understanding (TMU) that
defines the information that will be used to monitor the program, and reflects the
understanding reached between the Zambian authorities and the IMF.

2. Madam, the Zambian Government requests the IMF’s support for this policy program. The
program is carefully calibrated to the country’s specific circumstances, notably, an untenable
fiscal position, including debt distress and limited buffers to mitigate and deal with external
shocks, exacerbated by low economic activity and growth. The request is for financial
assistance through a 38-month arrangement under the Extended Credit Facility (ECF),
covering the period 2022 to 2025, in an amount of SDR 978.2 million (100 percent of
Zambia’s quota), to be disbursed in seven installments, with the first disbursement
equivalent to SDR 139.88 million (or 14.3 percent of quota). This financial support and the
catalytic impact of the Fund programme would help us address our pressing balance of
payments needs (totaling $11 billion over 2022-25) and support our reform agenda. We
intend to use half of the IMF financing as budget support and the other half to rebuild
buffers by boosting the country’s international reserve position.

3. In line with our Eighth National Development Plan, we are of the considered view that
implementation of our economic plan will help strengthen Zambia’s economic and social
prospects for the benefit of every citizen. The on-going debt restructuring exercise with
official and commercial creditors is the foundation underlying the reform program. Further,
the plan prioritizes protecting and upscaling social sector spending, including on social
safety nets; improving the design and implementation of the subsidy program in agriculture;
restructuring and removing subsidies in the petroleum sub-sector; and promoting
infrastructure development by leveraging the Public Private Partnership financing model.

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4. The policies of the Zambian Government in the MEFP have been tailor-made in order to:

• return to debt sustainability through debt restructuring with official and commercial
creditors;
• gradually and sustainably improve public finances through revenue enhancement and
expenditure rationalization;
• enhance commitment controls to reduce wasteful expenditure and build up in domestic
arrears;
• maintain recent gains in inflation to single digit after more than three years of double-digit
inflation, through a multi-pronged strategy involving a combination of fiscal and monetary
policy measures as well as improved agricultural production, particularly food;
• strengthen external resilience and reserve buffers through policies that support trade
surpluses, and encourage net exports and foreign direct investment;
• enhance the sustainability of growth through creation of a supportive environment for the
major sectors of agriculture, mining, tourism, manufacturing, and services; and
• fight corruption and strengthen AML/CFT while promoting good governance overall.

5. To begin the implementation of our program, we have taken several prior actions, as
described in Table 1 of the MEFP. So far, eight of the nine prior actions have been
implemented, and the remaining one will be completed ahead of the IMF Executive Board
consideration of our program request. We commit to ensuring the appropriate use,
monitoring, and reporting of the recent increase in our SDR allocation, which will be used for
social and priority spending. Furthermore, we reaffirm our commitment to upholding the
obligations of Article VIII of the Fund’s Articles of Agreement. We shall provide timely
information necessary for monitoring economic developments and the implementation of
policies defined in the program as agreed in the TMU, or upon request.

6. The Zambian Government believes that the measures and policies set forth in the attached
MEFP are appropriate and sufficient to achieve the objectives of the program, but stands
ready to take any additional measures that may be necessary. We will consult with the IMF
on the adoption of such measures in advance of any revision of the policies contained in the
MEFP, in accordance with the IMF’s policies on such consultations.

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7. The government commits to providing the IMF with information on the implementation of
the agreed measures and the execution of the program, as provided for in the TMU. In
addition, the government authorizes the IMF to publish this letter and its attachments, as
well as the staff report and debt sustainability analysis, after the program has been approved
by the IMF’s Executive Board.

Yours sincerely,

/s/ /s/

Situmbeko Musokotwane, MP Denny K. Kalyalya

Minister of Finance and National Planning Governor, Bank of Zambia
Republic of Zambia Republic of Zambia

Attachments:
I. Memorandum of Economic and Financial Policies (MEFP)
II. Technical Memorandum of Understanding (TMU)

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Attachment I. Memorandum of Economic and Financial Policies,

2022–25

1. This Memorandum contains the Government of the Republic of Zambia’s economic and
financial policies for the period 2022 to 2025, supported by the IMF under a three-year
Extended Credit Facility (ECF) arrangement. It provides an assessment of recent economic
developments (Section I), medium term outlook and risks (Section II), policies for 2022 and the
medium term (Section III), economic statistics (Section IV), and programme funding and monitoring
(Section V).

2. The Zambian economy recorded improvements in 2021 compared to 2020, but macro
fundamentals still remain weak. Entrenching macroeconomic stability, attaining higher and more
sustainable growth, building resilience to external shocks, and returning to debt sustainability remain
key medium-term objectives. Other key objectives are improvements in human development, and
attainment of a conducive governance environment.

3. In pursuit of these overarching socio-economic objectives, the Zambian Government

has an economic transformation agenda anchored on four pillars, namely: economic
transformation and job creation; human and social development; environmental sustainability;
and a good governance environment. These pillars form the bedrock of the Eighth National
Development Plan (8NDP), 2022-2026. The Plan also contains structural and legal reforms aimed at
addressing impediments to higher and more sustainable growth.

I. RECENT ECONOMIC DEVELOPMENTS

COVID-19 Impact

4. As in other countries around the World, Zambia continues to face the lingering effect
of the COVID-19 Pandemic. As at 27th June, 2022, the country had recorded 325,348 cases, with
4,003 deaths, since the first case was reported in mid-March 2020.

5. To mitigate the effects of the COVID-19 Pandemic, Government has continued with the
national vaccination programme. In the 2022 Budget, K704.3 million was allocated towards the
procurement of vaccines. Part of the $1.33 billion received from the International Monetary Fund
under the SDR allocation, has been earmarked for utilization in the health sector, including
procurement of drugs and medical supplies. As at 27th June, 2022, the vaccination coverage was 40.4
percent full vaccination, against a target of 70 percent by end-June 2022. This remains relatively low
compared to the country’s COVID-19 Vaccine Deployment Strategy and is largely due to vaccine
hesitance, myths and misconceptions about vaccination and limited funds for various aspects of
service delivery.

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6. Vaccine sourcing has continued, either through procurement or donations by bilateral

and multilateral organizations. The vaccines being sourced include AstraZeneca, Johnson &
Johnson, Sinopharm, Moderna and Pfizer.

Growth

7. Economic activity picked up in 2021 from a contraction in 2020, but growth still
remains below trend and levels required to have a meaningful impact on poverty and
inequality. Preliminary estimates indicate that Real Gross Domestic Product (GDP), was
recorded at 3.6 percent, from a contraction of 2.8 percent in 2020. In 2019, real GDP growth was
1.4 percent. The increase in the GDP outturn in 2021 was mainly driven by the information and
communication technology and construction sectors. Sectors such as manufacturing, wholesale and
retail trade, transport and tourism also returned to positive growth. The contribution by the
agricultural sector to growth was negligible while the mining sector contracted, mainly due to
operational challenges at some mining companies and a drop in ore-grades. This was despite copper
prices remaining generally high during the year.

Fiscal Performance

8. Fiscal performance has been challenging over the past three years. On cash basis, the
fiscal deficit was 8.7 percent of GDP in 2019, 14.2 percent and 9.0 percent of GDP in 2020 and 2021,
respectively. This was against the targeted budget deficits of 6.5 percent of GDP in 2019, 5.5 percent
and 9.3 percent of GDP in 2020 and 2021, respectively.

9. Revenues and grants performed strongly in 2021, relative to target. At K98.9 billion,
total revenues and grants were higher than the target by 45.6 percent, driven by over-performance
in income taxes of 55.4 percent, 14.4 percent for VAT, and 4.2 percent for Customs and Excise duties.
The over-performance in income taxes was largely associated with higher corporate income tax from
mining firms, reflecting higher copper prices, and depreciation of the Kwacha in the first half of 2021.
Improved domestic economic activity explains the higher outturn in domestic VAT and customs duty.
Non-tax revenues amounted to K25.3 billion and therefore exceeded the target by 101 percent,
mainly attributed to mineral royalties and a dividend receipt from Bank of Zambia. Although mineral
production levels were lower compared to 2020, mineral royalty collections at K12.4 billion, more
than doubled the target of K5.7 billion, largely due to the depreciation of the Kwacha in the first half
of the year, as they are receipted and paid in U.S. dollars.

10. Government spending, including amortization, in 2021, was K138.0 billion which was
15.4 percent higher than the target of K119.6 billion. Notable over-expenditure was recorded for
personnel emoluments (associated with higher costs for staff in foreign embassies due to the
depreciation of the Kwacha), use of goods and services (for the General and Presidential Elections
held in August 2021, as well as the fight against the COVID-19 Pandemic), and transfers and
payments (mostly overruns associated with modernization of the Zambia Revenue Authority, the
Farmer Input Support Programme and an unbudgeted outlay of K235 million to pay off some ZESCO

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arrears to IPPs). Spending on social benefits was above target by 29.7 percent. On the other hand,
expenditure on capital projects was below target by 5.9 percent.

Financing and Debt

11. Rapid debt accumulation on the backdrop of deteriorating economic fundamentals has
led to unsustainable debt levels and subsequent accumulation of arrears. Debt contracted has
mainly been for infrastructure projects in sectors such as roads, education, health and defence.

12. On account of challenges in obtaining external budget support, disproportionate

reliance was placed on domestic borrowing. Over the period 2019-2021, net external financing
averaged 5.3 percent of GDP. All external financing during the period was attributed to project loans
only, as no programme loans were contracted. High debt levels and debt servicing requirements
amidst reduced fiscal space, were the main factors that hindered access to external programme
financing. This led to central government financing having to be met from domestic borrowing,
which peaked at 14.4 percent of GDP in 2020.

13. Domestic financing in 2020 included a COVID-19 Bond (2.1 percent of GDP), and
Government Securities (10.5 percent of GDP), part of which were used to pay FISP arrears (2.8
percent of GDP) and to refinance fuel arrears (0.9 percent of GDP). The remaining balance on
Government securities issued, of 6.8 percent of GDP, was for ordinary budgetary purposes.

14. In 2021, domestic financing amounted to K31.2 billion, against a target of K17.5
billion. As in 2020, much of this financing comprised Government securities, K16.0 billion (4.4
Percent of GDP), of which FISP and fuel refinancing amounted to K14.0 billion (3.8 percent of GDP).
The uptake of FISP and fuel financing, therefore, continued to dominate at the expense of ordinary
categories of expenditure. In view of the above, the stock of Government securities increased to
K189.7 billion, as at end-September 2021, an increase of 45.7 percent from the position at end-
December 2020. Apart from financing FISP and fuel arrears, the increased financing went towards
COVID-19 Pandemic related expenditures, which included drug procurement, dismantling of arrears,
and economic empowerment programmes. This was done mainly through issuance of Government
securities through private placements.

15. Regarding external debt 1 , the stock has increased marginally to $13.22 billion as at end
March 2022 2 from $13.04 billion at end-December 2021. This marginal increase was attributed to
the few disbursements on existing project loans from multilateral creditors who have not been
affected by the debt service standstill and hence have continued to disburse. The proportion of
commercial debt out of the total central Government external debt at end-March 2022 was 44.7

1
The definition of external debt and creditor classification reflect the concepts used in the government’s quarterly
debt statistics bulletin.
2 This amount excludes interest arrears and other debt related charges.

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percent, while multilaterals (including plurilaterals) 3 and bilateral creditors accounted for 25.3 and
30.0 percent, respectively.

16. The Government’s stock of publicly guaranteed debt was $1.51 billion 4 as at end March
2022 from $1.55 billion at end 2021. The bulk of the guaranteed debt relates to the state-owned
power utility company ZESCO (92.7 percent), including the Kafue Gorge Lower power project.

17. As a consequence, the stock of public and publicly guaranteed external debt, excluding
interest arrears, fuel arrears and guarantees on ZESCO payables, increased to $14.73 billion
(67.7 percent of GDP) at end March 2022 from $14.57 billion at end 2021. However, the stock of
public and publicly guaranteed debt reduced from $26.15 billion at end December 2021 to $25.87
billion at end March 2022 mainly due to changes in the exchange rate 5 used to convert domestic
debt into the US dollar equivalent. At end March 2022, the stock of undisbursed Central Government
External debt was $3.93 billion and $787.49 million in guaranteed external loans.

Arrears

18. Zambia has accrued significant external arrears. External public debt arrears amounted to
$2.43 billion as at end-March 2022 composed of $1.63 billion in principal arrears (included in the
debt stock) and $793.9 million in interest arrears. The accumulation of arrears follows the inability of
Government to meet fully its debt obligations to all creditors which led to Government implementing
the debt service standstill. As at end January 2022, a further $563 million in arrears had accrued to
contractors who continued to undertake works even where the financiers had discontinued
disbursements.

19. To ensure fair, transparent and equitable treatment of all its creditors, Government in
October 2020 communicated suspension of debt service to all its non-multilateral external
creditors. This was with the exception of very few bilateral and/or commercial creditors financing
nearly completed priority projects, which were deemed of critical social and/or economic
significance. In this regard, actual debt service in 2021 was $232.58 million against the budgeted
$1.39 billion. As at end March 2022, total debt service amounted to $ 19.65 million.

20. The stock of central Government domestic arrears has also increased. Excluding fuel,
ZESCO arrears and unverified VAT refund claims, the stock of domestic arrears amounted to
K48.1billion at end December 2021, from K41.1 billion at end December 2020. The bulk of the arrears
are on road projects, goods and services, capital expenditure in health and education, pensions and

3
Plurilateral institutions include concessional lenders, such as BADEA, EIB, OFID, and NDF, and commercial lenders, such
as Afrieximbank and ESA TDB.
4Excluding guarantees on ZESCO’s outstanding payables (mainly PPA arrears).
5
End December 2021 Exchange Rate used was ZMW16.67/ $1 while end March Exchange Rate used was
ZMW18.04/$1.

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compensation and awards. The build-up in domestic arrears is reflective of revenue shortfalls,
financing challenges and weak commitment control systems.

21. The national power utility company, ZESCO, has significant arrears, posing a fiscal risk
to the Treasury. As at end-March 2022, ZESCO had outstanding payables amounting to $1,873
million to various suppliers as well as independent local and international power producers (IPPs). In
addition, arrears for Government guaranteed loans amounted to $64.5 million of which $41.4 million
were external and $23.1 million were domestic. The company accrued substantial arrears due to the
impact of drought on its generation capacity, higher purchase price of power from IPPs relative to
the tariff, high overhead costs and non-cost reflective tariffs.

22. Fuel arrears have risen significantly. This was due to the lack of financing to pay for the
explicit subsidies arising from the price differential between the landed cost of petroleum products
and the pump price. Further, pump prices had not been adjusted since 2019, partly reflecting
concerns on the impact of such increases on inflation and incomes of the poor, particularly in the
midst of the pandemic. Due to non-adjustment of fuel pump prices to cost reflective levels till mid-
December 2021, the stock of fuel arrears as at end-December 2021 amounted to $597 million,
including $169 million of late payment interest.

Monetary and Financial Sector Developments

23. Inflationary pressures intensified in 2020 and over the first half of 2021, with inflation
deviating further away from the 6-8 percent target range and remaining firmly in double
digits. Inflation, which averaged 9.1 percent in 2019 rose to an average of 15.6 percent in 2020
and further to 22.1 percent in 2021. The increase in inflation was mainly attributed to the pass-
through from the depreciation of the Kwacha against the US dollar and upward adjustments in
energy prices (fuel pump prices and electricity tariffs) in December 2019 and early 2020. Upward
pressures on food prices following the adverse impact of the 2018/19 drought and trade disruptions,
arising from restrictive measures taken in response to the COVID-19 Pandemic in early 2020, also
contributed to the rise in inflation.

24. To help mitigate the adverse consequences of the COVID 19 Pandemic on lives and
livelihoods and ultimately on financial stability, the Bank of Zambia reduced the Policy Rate by
a cumulative 350 basis points in 2020 to 8.0 percent. In addition, the Bank launched the
K10.0 billion Targeted Medium-Term Refinancing Facility (TMTR) and the K8.0 billion Secondary
Market Bond Purchase Program (SMBPP). The primary objective of these measures was to safeguard
financial sector stability by making liquidity readily available to the financial intermediaries.
As at June 30, 2022, K9.8 billion was disbursed under the TMTRF. The SMBPP, on the other hand, was
fully executed by November 2020 with banks and pension funds as the main takers. Following the
upsurge in COVID-19 cases at the beginning of 2021 and the increased uncertainty on the path
of the pandemic, in February 2021 the Bank of Zambia, as a precautionary measure, augmented the
SMBPP with a further K10.0 billion. A further K5.0 billion was set aside to support the potential credit
guarantee scheme under the TMTRF. Out of this additional SMBPP amount, only K2.3 billion was
executed under the SMBPP as market liquidity conditions in the market subsequently improved.

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25. Faced with escalating inflationary pressures, in February 2021, the Bank of Zambia
raised the policy rate and also signaled its intention to progressively unwind the
accommodative monetary policy measures, as conditions allowed. In this vein, and to anchor
inflation expectations, a 50 basis point upward adjustment in the policy rate was made brining
the rate to 8.5 percent. As inflation remained persistently high and well above the target range, in
November 2021, the policy rate was raised by a further 50 basis points to 9.0 percent. The policy rate
has since been maintained at 9 percent owing to projected lower inflation and the expectation that it
will revert into the target range by the end of 2023.

26. In 2022, inflation has trended downwards, continuing the trend that began in the
second half of 2021, despite the upward adjustment in fuel pump prices in December
2021.This was mainly as a result of strong dissipation of base effects in prices of fish, meat and
poultry products as well as seasonal increases in the supply of vegetables. In the first quarter of 2022,
annual overall inflation fell sharply to an average of 14.1 percent from 18.9 percent in the last quarter
of 2021. The decline was mainly attributed to the dissipation of base effects in prices of meat
products and fish. The lagged pass-through from the appreciation of the Kwacha coupled with
improved supply of some food items also contributed to the decline in inflation. In June 2022,
inflation declined further to 9.7 percent from 11.5 percent in April. Continued dissipation of base
effects in prices of meat and poultry products, improved supply of some vegetables and the
reduction in fuel pump prices were the main drivers of the fall in inflation.

27. Rising inflationary pressures, high lending rates, the sustained depreciation of the
Kwacha, and the sharp deceleration in economic growth have negatively affected the
performance of the banking sector over the past three years. These factors contributed to the
high cost of doing business and consequently weakened borrowers’ ability to repay loans leading
to a rise in non-performing loans (NPL). The NPL ratio averaged 12.2 percent in 2018, but improved
to 9.7 percent in 2019. However, in 2020, despite regulatory forbearance measures in the wake of the
COVID-19 Pandemic, the ratio deteriorated to an average of 11.2 percent. In addition, the country
experienced sovereign credit rating downgrades, which led to increased asset impairment on loans,
off-balance sheet exposures, and Government securities as per the International Financial Reporting
Standard 9 (IFRS 9) expected credit loss model. This exerted pressure on profitability as both return
on assets (ROA) and return on equity (ROE) significantly trended downwards thereby constraining
capital formation through retained earnings. However, as of 31st December 2021, the NPL ratio
improved to 5.8 percent owing to repayments and write-offs of some NPLs. Despite the low NPL
ratio, asset quality remains exposed to COVID-19 restructured loans which accounted for 7.2 percent
of the loan book.

28. The onset of the COVID-19 Pandemic compounded the unfavorable pre-existing
macroeconomic conditions thereby adversely affecting the business environment and
heightened credit risk. However, the high capital levels of the banks helped to buffer the impact on
their asset quality and their capital adequacy ratios which, at 23.2 and 24.6 percent at end December
2021, remained well above the minimum requirements of 5.0 percent and 10.0 percent for primary
and total regulatory capital, respectively. The corresponding figures as at end-May 2022 were 23.7

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percent and 24.8 percent, respectively. To safeguard financial system stability, in the wake of the
COVID-19 Pandemic and its potential devastating effects on the financial sector, the Bank of Zambia
undertook the following prudential measures:

• Revised the loan classification and provisioning rules to allow financial institutions to better
accommodate lending and refinancing to critical sectors of the economy by introducing more
permissible collateral types. In addition, the period for this relief was extended from one year to
five years;

• Allowed financial institutions to renegotiate terms and conditions for credit facilities to
counterparties negatively impacted by COVID-19 pandemic through restructuring or modifying
the loan agreements. Such renegotiated facilities were to be treated as current with no adverse
classification and provisions for loan losses; and

• Extended the International Financial Reporting Standard 9 transitional arrangement for financial
institutions to amortise the ‘Day 1 Impact’ of the implementation of the IFRS 9 for regulatory
capital adequacy purposes to 31stDecember 2022. Financial institutions were also allowed to add
back to regulatory capital any expected credit losses arising from the COVID-19 Pandemic.
Therefore, in the computation of regulatory capital, the add back would not only include the
‘IFRS 9 Day 1 Impact,’ but also any increases in provisions on account of the COVID-19 Pandemic,
and the total would be amortised over the period 1stApril, 2020 to 31stDecember, 2022.

29. The overall financial performance and condition of the non-bank financial institutions
(NBFIs) sector has been less than satisfactory over the past three years. This has largely been
due to poor asset quality and unsatisfactory earnings performance by two state-owned institutions.
Overall, delays by the Government to extinguish the arrears that had built up on loans extended to
civil servants and the adverse effects of COVID-19 Pandemic were the main drivers of the observed
poor asset quality. However, the Government reduced its arrears to NBFIs by July 2021 and has since
remained current. These developments are expected to lead to improvements in asset quality.
Further, the Bank of Zambia is closely monitoring the implementation of the expected cost
rationalisation measures at loss-making NBFIs.

30. Growth of credit to the private sector slowed down significantly, to 7.8 percent in 2021
from growth of 8.5 percent in 2020 and 17.2 percent in 2019. The slowdown in credit was largely
attributed to the deterioration in the macroeconomic environment and strict lending conditions by
banks as credit default risk heightened in the wake of COVID-19 Pandemic. In 2021, the reduction in
foreign currency denominated credit also contributed to the contraction in private sector credit
growth. However, Kwacha denominated credit expanded largely on account of increased drawdowns
on the Bank of Zambia Targeted Medium-Term Refinancing Facility (TMTRF) and the switch from the
foreign currency denominated loans to local currency loans.

31. Lending to the private sector showed some recovery in the first quarter of 2022,
growing by 1.3 percent, year-on-year. This was mainly on the back of increased Kwacha
denominated credit, partly attributed to continued drawdowns on the Bank of Zambia TMTRF and

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increased utilisation of overdraft lending facilities for working capital needs. Businesses needed
liquidity to meet rising operating costs following the increase in fuel prices and high cost of raw
materials as the Kwacha depreciated against the US dollar.

32. Commercial banks’ average lending rates remained elevated over the period 2019-
2021, averaging 26.0 percent, despite the accommodative monetary policy stance adopted in
2020. This largely reflected the high cost of funds on account of deteriorating macroeconomic
conditions and high Government security yield rates. The latter reflected large Government
borrowing needs in the face of higher than programmed expenditures, which were largely financed
from domestic borrowing. Commercial banks’ average lending rates remained elevated at 25.9
percent in December 2021, largely on account of the upward adjustment in the Policy Rate, high
inflation, and Government’s recourse to the domestic market to finance its budget. During the first
quarter of 2022, the lending rate remained broadly unchanged at 26.0 percent.

33. The exchange rate of the Kwacha against the US dollar depreciated significantly to
K21.17/USD at end 2020 from K14.05/USD in December 2019, before appreciating to
16.67/USD at end-December 2021. Since 2018, the sources of foreign exchange liquidity in the
market progressively reduced amidst unprecedented increase in demand, mostly for debt service
and the importation of agricultural inputs and clearance of fuel arrears. This has posed a challenge to
the smooth functioning of the foreign exchange market and hence, the entire economy, as it has
resulted in reduced availability of foreign exchange on the market. The reduction in the supply of
foreign exchange eventually led to a substantial fall in the interbank market turnover. However,
between May and August 2021the Kwacha strengthened sharply to K15.95/US dollar. This was
precipitated by a sudden surge in portfolio inflows, on the back of the news that Zambia received an
allocation of SDR 937.5 million (equivalent to US $1.33 billion) from the IMF as part of the general
SDR allocation to all members. Positive sentiments regarding the country’s macroeconomic outlook
following the Presidential and General Elections in August 2021 as well as the peaceful change of
Government and the anticipated improved prospects to secure an IMF-supported programme were
the other contributing factors to the sudden appreciation of the Kwacha against the US dollar. For
2021 as a whole, the Kwacha appreciated by 21.7 percent to K16.67/US dollar. In 2022, the Kwacha
has depreciated moderately by 1.8 percent to K16.96/US dollar as at 30th June, 2022 on account of
heightened demand, chiefly from the energy sector and non-resident financial institutions.

34. To promote orderly market conduct and provide clarity on market rules during periods
of extreme volatility in 2020 the Bank of Zambia strengthened the rules and regulations
governing the foreign exchange market. Enhancements to the trading rules included clarifying the
mechanism for declaring a market stress condition under which interbank trading could be
suspended until normal trading was restored and by registering all foreign exchange brokers to
improve the flow of information in the market. To help meet the increased demand for foreign
exchange in the face of constrained supply, the Bank also increased its support to the market by
selling back into the market all of the foreign exchange directly purchased from the mining
companies as tax payments.

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External Sector Performance

35. External sector performance deteriorated over the last three years. The deterioration
largely reflected higher external financing needs, particularly for debt service, at the time
when financial inflows from foreign direct investment were subdued. This was despite recording
current account (CA) surpluses of 0.6 percent, 12.0 percent and 7.6 percent of GDP in 2019, 2020,
and 2021 respectively, which were largely driven by increases in net exports occasioned by higher
copper export earnings and subdued imports. In the first quarter of 2022, the current account surplus
remained robust at an estimated 19.6 percent of GDP, from 21.2 percent in the fourth quarter of
2021.

36. Gross international reserves declined to $1.2 billion in 2020 from $1.6 billion in 2018,
largely on account of external debt service. Waning balance of payments support during the
period did not help the situation. However, the fall in reserves was moderated by Bank of Zambia
purchases of foreign exchange from the market and mineral royalties directly from the mining sector
since mid-2019. In June 2020, the mining companies also started channeling their other U.S. dollars
denominated tax obligations through the Bank of Zambia in an effort to shore up reserves. Further,
in December 2020, the Bank of Zambia started purchasing locally produced gold to strengthen the
reserve position. As at end-December 2021, reserves stood at $2.8 billion mainly due to receipt of
SDR equivalent to $1.33 billion from the IMF in August 2021. Reserves increased further to $3.03
billion at end-June 2022. Receipt of $156.8 million World Bank support to the Ministry of Health as
well as mining tax payments were key to this outturn.

II. MEDIUM TERM OUTLOOK AND RISKS

37. The economy’s medium-term outlook is positive but its realization is uncertain. With
strong policy action and effective implementation of structural reforms, some traction can be
made to enhance macroeconomic stability and growth. Consistent movement towards fiscal and
debt sustainability, reducing arrears and increasing social sector spending will be key components of
this strategy.

38. In the medium term, growth is projected at 3.1 percent, 4.0 percent, and 4.1 percent in
2022, 2023, and 2024, respectively, way below the trend growth of around 5 percent. The
general assumption is that there will be a gradual return to normalcy in global and domestic
economic activity. However, a stronger growth outcome can be achieved depending on the pace and
depth of policy reforms, and the buoyancy of commodity prices.

39. The medium-term economic outlook is subject to several risks. These include:

• Increases in global energy and food prices, exacerbated by the on-going Russia-Ukraine conflict.
This threatens supply chains of commodities by causing disruptions especially in the energy and
agriculture sectors and thereby likely to pose an inflation risk;

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• A fall in the copper prices. This might reduce foreign exchange in the country, stifle investment
and hinder growth in the mining sector and other sectors that depend on the mines and reduce
revenues for the Treasury;

• Unfavorable weather conditions which could adversely affect sectors such as agriculture, mining
and energy;

• Delayed and weak implementation of policy reforms;

• Protracted and/or delays in undertaking debt restructuring; and

• Outbreaks of more infectious strains of COV1D-19.

III. POLICIES FOR 2022 AND THE MEDIUM TERM

40. The goal of Government’s economic policies in the medium term is to entrench
macroeconomic stability and growth, attain debt and fiscal sustainability, and improve the
livelihoods of the Zambian people, especially the vulnerable. These objectives rest on the four
Pillars in the Eighth National Development Plan.

A. FISCAL POLICY AND REFORMS

41. Fiscal Deficit. The overriding objective of fiscal policy is to progressively improve the primary
balance, on a cash basis, from a deficit of 2.1 percent of GDP in 2021 to a surplus of 0.7 percent of
GDP in 2024. On commitment basis, the target is to improve the primary balance to a surplus of 3.2
percent of GDP by 2024 from a deficit of 6.0 percent of GDP in 2021. Government undertakes to
adhere to these overriding fiscal objectives. It commits to therefore take appropriate revenue,
expenditure, and contingency measures to ensure their attainment so as to enhance the credibility of
the budget. The recently published Green Paper for the 2023-25 Medium Term Budget Plan and the
2023 Annual Budget is aligned with these objectives (prior action, see Table 1).

42. On the revenue side, domestic revenues are projected to remain above 20 percent of
GDP at 22.2 percent of GDP in 2024 from 22.7 percent of GDP in 2021, in line with the 2023-
2025 Medium Term Expenditure Framework (MTEF). Government will employ a combination of
revenue mobilisation and administration reforms, expenditure rationalisation, strengthening public
financial management to enhance public spending, as well as debt restructuring, to attain its
medium-term fiscal objectives.

43. Tax Policy. To broaden the tax base, Government made an upward adjustment of excise
duties on alcohol and cigarettes as well as expanded the scope on goods subject to excise duty, and
streamlined the tax incentives structure to avoid wastage in 2022. Further, by end-September 2022,
Government will reinstate VAT and excise duty on petroleum products (structural benchmark, see
Table 2). Excise duty for diesel will be restored to the level of the Road levy. Reinstatement of VAT
and excise duty, coupled with elimination of price support that was undertaken in mid-December

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2021, will result in elimination of all fuel subsidies. Undertaking these measures will lead to an
improvement in VAT collections to 5.7 percent of GDP in 2024 from 4.5 percent of GDP in 2021 while
customs and excise duties are projected to increase to 2.7 percent of GDP in 2024 from 2.4 percent
of GDP in 2021. Income taxes are projected to increase to 5.5 percent of GDP in 2024 from 5.4
percent of GDP in 2021.

44. Tax Administration. To augment domestic resource mobilization, Government will continue
to strengthen tax administration during the medium term. This will be done by fast tracking the
rolling out of electronic fiscal devices to enhance VAT compliance, introduce digital stamps on
excisable products to improve excise duty collection and complete implementation of the
Telecommunications Traffic Monitoring System (TTMS) by end-2022. The Zambia Revenue Authority
will enhance its collaboration with local authorities to expand the tax base and increased revenue
collection. The Government will implement a data matching project which will enhance compliance
by matching customs and inland-revenue declarations as well as interfacing with national data
registers on the Government Service Bus platform in 2022. To further support the efficient collection
of taxes by reforming revenue collection administration, a Tax Administration Diagnostic Assessment
Tool (TADAT) assessment was conducted in the first quarter of 2022 to determine the strengths and
weaknesses of the tax administration system. The gains from both tax administration and policy
measures are expected to yield 3.2 percent of GDP over the period 2022-2024.

45. Non-Tax Revenue. Non-tax revenue is projected at 4.0 percent of GDP in 2024 from 3.4
percent of GDP in 2021. Non-tax revenue will rise substantially in nominal terms mainly as a result
of utilization of e-payment platforms for Government services. Mineral royalty is also projected to
increase substantially in nominal terms mainly due to the projected increase in both copper
production and copper prices.

46. Government is working in collaboration with cooperating partners to improve tax

policy and administration. The measures envisaged to be undertaken include review of the
appropriateness of the bands for Personal Income Tax and the multiplicity of rates for Corporate
Income Tax with a view towards consolidation in the medium term. The revenue effort will be
enhanced by increasing tax compliance, enhancing customer focus and collaboration, improving
process efficiency and enhancing the performance of the Zambia Revenue Authority, in line with
its 2022-2024 Corporate Strategic Plan. To enhance the monitoring of mineral production in the
country, ZRA will leverage on the exit strategy of the Mineral Value Chain Monitoring Project by re-
establishing the Mineral Data Analysis Centre under the Large and Specialised Tax-Payer Office by
March 2022. The centre will undertake regular mineral data analysis and make recommendations to
audit and enforcement teams.

47. Government will amalgamate all the tax policy and administration measures into a
comprehensive and holistic strategy and action plan. This is aimed at durably boosting revenues.
The action plan will be prepared by end-October 2022 (structural benchmark, see Table 2).

48. Expenditure Rationalisation. On the expenditure side, total expenditure (including

amortization) is projected to increase to 36.6 percent of GDP in 2024 from 32.4 percent of GDP in

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2021. This is largely on account of an increase in the public service wage bill to 8.9 percent of GDP in
2024 from 7.5 percent of GDP in 2021 following recruitments of mainly frontline personnel in the
health and education sectors in 2022 and the medium term as well as government’s ambitious
arrears dismantling strategy in the medium term. Government intends to recruit 30,000 teachers and
11,726 health personnel in 2022. Recruitment will also be done for extension officers in the livestock
sub-sector. Significant resources have also been allocated for the Constituency Development Fund
(CDF), whose utilisation scope has been widened.

49. Government had intended to create space for greater social sector spending by limiting
expenditure on the Farmer Input Support Programme (FISP) through migration to the more
cost-effective e-Voucher system from the 2022/2023 farming season. However, due to tight
supply conditions and high prevailing prices on the international market, migration to a broader and
more efficient system will be done from the 2023/2024 farming season. Consequently, expenditure
on FISP in 2022 will remain elevated at 2.1 percent of GDP but reduce to 1.3 percent of GDP in 2024
mainly due to implementation of a new comprehensive agriculture support programme from the
2023/2024 farming season.

50. Capital expenditure is projected to reduce to 2.9 percent of GDP in 2024 from 4.1
percent of GDP in 2021. This is in line with the Public Investment Strategy that aims at cost
effectiveness in undertaking public investment projects and limiting Government’s exposure to such
projects to within approved budgets.

51. In view of the increased resource allocation to Local Authorities through the CDF which
commenced in 2022, public financial management systems at local level are being
strengthened. This has entailed preparation of guidelines and standards for utilization,
management, monitoring and evaluation of resource use coupled with capacity building, in line with
the Constituency Development Fund Act No. 11 of 2018. The guidelines and standards were finalized
in January 2022 and launched in February 2022. Subsequent work has involved sensitization and
training of stakeholders, especially local authorities. To ensure adherence, the provisions in the Public
Finance Management Act of 2018 including the sanction regime, will be applied in managing the
resources under the CDF.

52. Use of the SDR Allocation. In August, 2021 Zambia received Special Drawing Rights
equivalent to $1.33 billion from the International Monetary Fund. Government intends to use at least
50 percent of the proceeds to finance the 2022 Budget, while the balance of 50 percent will be used
as a buffer against any financing shocks in the domestic market. A Memorandum of Understanding
will be established between the government and the Bank of Zambia to clarify the roles and
responsibilities for servicing the associated financial obligations to the Fund.

53. Arrears on Expenditure and VAT Refunds. Government has developed and published a
strategy for clearance of expenditure arrears and VAT refunds (prior action, see Table 1). The arrears
are owed for Personal Emoluments, bills for consumption of public utilities (telephone, water and
electricity), VAT refunds, FISP, maize purchases under FRA, unpaid pension benefits, outstanding bills
on Road Construction Programme under the Road Development Agency (RDA), Other Recurrent

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Departmental Charges (RDC’s), Provisions (Rations), awards and compensation and Capital
Expenditure on other civil works/contracts other than Road Projects.

54. Fuel arrears, which are foreign currency denominated will also be addressed through
the strategy. In addition, ZESCO arrears owed to Independent Power Producers (IPP) and for
emergency power imports (some of which are foreign currency denominated), will be addressed as
part of the overall debt restructuring exercise.

55. The medium-term expenditure and VAT refund arrears clearance strategy involves
halting the accumulation of new arrears and dismantling the existing stock, for which a sum of
K30.5 billion has been earmarked over the period 2022-2024. The key features of the strategy
include increased budget provision, debt and/or cheque swaps, as well as debt refinancing and
restructuring. Due to the huge amounts involved, clearance of domestic arrears can only be done in
the medium to long-term. The target is to eliminate domestic arrears by end 2026. As a start,
Government has dismantled all outstanding pension arrears accumulated for the period ending
December 2021 for public service workers.

56. To halt the accumulation of arrears, a Commitment Control Module was developed in
the Integrated Financial Management Information System (IFMIS) that links procurement
commitments to the approved budget. Further, to support the use of IFMIS, Government adopted
provisions to separate budget releases from cash releases, with budget releases done on a quarterly
basis and based on procurement and cash plans. The configuration of Commitment Control Module
in IFMIS was completed at the end of May 2022. Training of end users was completed in June 2022,
and the module became operational in July 2022. Government will ensure that all ministries and
provinces register purchase orders and other financial commitments in the IFMIS by end-June 2023
(structural benchmark, see Table 2).

57. To enhance the commitment control system as well as expand the scope and capture of
arrears, Government sought technical assistance from the IMF. The recommendations from the
technical assistance are currently being implemented. The recommendations relate to key areas such
as payroll processes and controls, arrears management and clearance, and strengthening the
Treasury Single Account.

58. Enforcement of the Public Finance Management Act and regulations, which contain
stringent punitive measures to non-adherence will be another key deterrent in preventing the
accumulation of arrears. In this regard, the Ministry of Finance and National Planning issued a
Treasury Circular at the beginning of 2022 on the punitive measures for non-adherence to the
arrears clearance strategy, sticking to the budgetary allocations and controls required before
commitments are made to all MPSAs. Further, a Treasury Circular providing guidance on clearance of
arrears was issued in February 2022.

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ZESCO Arrears and Reforms

59. The power utility company ZESCO is faced with a number of financial and operational
challenges that have plagued it. These are summarised as follows:

a) Debt: ZESCO’s total outstanding debt as at end March 2022 amounted to $3 billion,
comprising $1.87 billion in payables (including $1.7 billion for power purchases) and
$1.13 billion in both domestic and external loans 6. The stock of on-lending facilities
owed to the Central Government amounted to $368.6 million, $120.6 million to
commercial lenders and $638.2 million Government guaranteed loans.

b) Revenue: Over the years, ZESCO’s revenues have been adversely impacted by non-cost
reflective tariffs coupled with low electricity generation due to low water levels as a
consequence of frequent droughts and climate change effects. In 2021, however, an
improvement in ZESCO’s revenues of 19 percent compared with 2020 was recorded,
driven by an increase in exports and sales volumes to domestic customers coupled with
the depreciation of the Kwacha against the United States dollar. The increase in
domestic sales is attributed to reduced load management owing to an improved
electricity generation during the 2021 fiscal year;

c) Costs: ZESCO has had a phenomenal growth in operating costs from 2015 to 2019 of
about 135 percent. This has hampered ZESCO’s ability to service its debt obligations.
Operating expenditure (OPEX) in 2020 totaled $650 million mainly caused by ZESCO
purchasing the electricity at higher prices from IPPs than the electricity tariff it charged
customers, emergency power imports and the implementation of capital projects to
increase production. However, in 2021, ZESCO’s operating costs were lower than 2020
driven by lower purchases of electricity from Ndola Energy, Maamba collieries and
Lunsemfwa; and

d) Operations: Over the years, ZESCO has been facing challenges leading to load
shedding that has resulted in reduced revenue amidst increasing operational costs. In
the financial year ended 31st December 2020, management accounts indicate that the
company posted a huge net loss margin of K12.2 billion (USD580 million). During the
2021 financial year, however, the company recorded an increase in power generation at
Kafue Gorge Upper, Kariba North bank and Kafue Gorge Lower (arising from pre-
recommissioning testing). As a result, the company was able to meet demand using
own generation despite a drop in available power from the IPPs resulting in an overall
lower cost of sales. According to unaudited financial statements for the year ended 31st
December 2021, the company recorded a net profit of K12.1 billion ($607 million)
driven by lower cost of power purchases, reduced provision for doubtful debts and
exchange rate gains.

6 As at end 2021, ZESCO had accumulated arrears on debt service amounting to $91.3 million.

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60. The improvements in 2021 notwithstanding, Government recognises the precarious

financial condition that ZESCO Limited is currently in and seeks to transform it by
implementing a 5-year turn-around Strategy that covers the period 2021 to 2025. The strategy
has five key focus areas as follows:

a) Debt Restructuring: The Government is working with ZESCO to have its external debt
restructured to ensure financial sustainability of the company. ZESCO’s guaranteed external
debt will be restructured as part of the overall debt restructuring exercise for central
Government while the non-guaranteed external debt including emergency power imports
will be restructured bilaterally between ZESCO and the respective creditors. ZESCO
negotiations on tariff revision have concluded with Maamba, Itezhi Tezhi Power Corporation
(ITPC) and Copperbelt Energy Company (CEC). The effective date of the revised tariffs for
Maamba was 1st June, 2022, while finalization of the agreement with ITPC awaits conclusion
of discussions on a payment plan for accrued arrears. The negotiations are expected to be
completed by end September 2022.

b) Optimisation of CAPEX: ZESCO will by end December 2022 reevaluate all non-committed
CAPEX projects sitting in the 2019- 2025 corporate strategic plan that have not yet been
drawn down to derive the best economic value, while all major projects that require to be
financed from ZESCO’s balance sheet will not be embarked on during the stabilisation and
recovery period of the turnaround period. Going forward, ZESCO will also implement a new
criteria of project selection (Guiding Principles) to ensure that projects are self-financing and
meet the strict minimum investment criteria of 14 percent Internal Rate of Return (IRR),
30 percent EBITDA margin, and 1.2 Debt Service Coverage Ratio. The investment policy is in
place and will undergo regular reviews. Further, Government driven projects which neither
contribute to ZESCO’s profitability nor support the turnaround will be suspended.

c) Optimisation of OPEX: This will entail reduction of operating expenditure across the entire
value chain which includes a reduction in labour costs through rationalisation and reduction
of staff numbers and implementing a Voluntary Separation Scheme (VSS), automating
processes and outsourcing some services via cost benefit analysis. Other efforts will include
targeted measures such as suspending donations and grants and suspension of non-critical
trainings. All of the above measures are expected to yield a 20 percent reduction in operating
expenditure and a 10 percent reduction in the cost of labour in 2022.

d) Tariff Adjustment and Revenue Efficiency: the Cost-of-Service Study (CoSS) was
completed in October 2021 and handed-over to the Government in December 2021. A key
finding of the CoSS was that mining companies should pay a lower tariff, while upward
adjustments should be made for retail and commercial consumers. This finding was largely
on the basis of the methodology used which focused on cost accumulation. To authenticate
the results, Government subjected the findings to peer review from local and international
energy experts, as well as multilateral institutions such as the World Bank and the African
Development Bank. The peer review process was concluded in July and Government will
finalize its policy response and publish it together with the cost of service study prior to

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consideration of the programme request by the IMF Executive Board (prior action). The policy
objective remains a multi-year migration to cost-reflective electricity tariffs, with the
migration path published by end-December 2022 (structural benchmark). For the retail
customers, ZESCO will apply to the ERB for tariff adjustment considering the lifeline tariff to
cushion low income households, in line with the Electricity Act No. 11 of 2019.

e) Asset Optimisation: ZESCO plans to focus on assets in which it has a stake and are
standalone by carrying out valuation of all these assets that are separate entities and pursue
a dilution of its holding in them; and outright sale of identified assets, including through
IPOs. As regards the timelines for optimisation of assets, ZESCO will embark on this
intervention during the recovery phase of its turnaround strategy expected to begin in
January 2023. The intention is to divest from ventures that are not delivering the expected
value and partially divest from investments that are delivering value in order to release the
capital therein for investment in assets core to the survival of the business.

Fuel Arrears and Reforms

61. Arrears accumulation on fuel supply remains a challenge. The Ministry of Energy has
since 2016 been accumulating arrears on petroleum products arising from the landed cost being
lower than the pump price. As at December 2019, fuel arrears amounted to $499.39 million, which
increased to $ 717.26 million at end-June 2020, and closed at $467.3 million at end-December 2020,
following payments that were made to reduce the arrears. The stock of fuel arrears as at end-
December 2021 was $597 million. Government will undertake an audit on the evolution of the fuel
arrears to authenticate the quantum owed to fuel suppliers.

62. Whilst price adjustments were made periodically prior to 2016, the sharp depreciation
of the exchange rate of the kwacha and increases in the global price of petroleum products
have led to challenges in attaining cost reflectivity in pricing. The increase in inflation,
particularly in 2020 and 2021, has further made adjustment of prices challenging. The accumulation
of arrears resulted in the Government reducing Excise duties on fuel while VAT was zero-rated for
diesel and petrol.

63. To gradually return to cost-reflective pricing and cushion against a rapid raise in the
cost of production and the cost of living, a multi-step petroleum price adjustment and reform
process will be implemented. In the first step, an upward revision of petroleum prices to eliminate
price support was effected in December 2021. Further, commencing 31st January, 2022, the pricing
cycle for petroleum products was adjusted from 60 days to 30 days with prices adjusted based on
the cost-plus pricing model, while maintaining the pricing trigger band of +/- 2.5 percent (prior
action). In the second phase, reforms to remove the inefficiencies in the fuel supply chain, by among
others, supplying of diesel through the pipeline and procurement reforms to standardize supply
contract prices will be undertaken in line with the recently adopted procurement regulations (prior
action). As a final push towards cost-reflectivity, Government will reinstate VAT and Excise duty on
petroleum products by end-September 2022 (structural benchmark), concurrently with pumping
diesel through the pipeline and the procurement reforms.

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FISP Reforms

64. The Farmer Input Support Programme is the flagship input delivery programme for
more than one million small scale farmers. Over the past few years, the delivery mode for the
programme has been through direct input supply and use of electronic platforms. Farmers under the
electronic platform were getting fewer bags of fertilizer and seed, relative to those under the direct
input support mode. This was due to the escalation in prices which lowered the number of bags they
could purchase from the funds they received. The direct input supply mode has been associated with
a large monetary outlay, which has been consistently above budgetary allocations due to high
administrative and transportation costs as well as input price escalations.

65. To make the FISP programme more cost effective, better targeted and equitable across
beneficiaries, Government will implement a new Comprehensive Agriculture Support
Programme (CASP) beginning in the 2023/2024 farming season. The scope of the programme
will be expanded over and above the provision of subsidised inputs to farmers through the electronic
agro-input system to include extension service support, access to finance, support to value addition,
storage and logistics. The design of the programme, including publication of its guidelines will be
undertaken by end-December 2022 (structural benchmark).

66. In order to enhance transparency relating to FISP, Government has published (prior
action) and will publish the list of future suppliers of inputs on the Ministry of Agriculture
website. The information will include the name of the suppliers, products, quantity to be supplied,
and contract amount. In line with the Public Procurement Act, the information will also include the
beneficial owners. With regard to the audit of FISP, the Controller of Internal Audit (CIA) undertook a
value for money audit of the programme in 2021. Some of the findings of the audit indicate that the
programme had no accountable documents used in the stock management system, there was no
benchmarking in the landed cost of inputs with the average market price, no certification and
verification of the quality and weights of the delivered inputs. Further, with respect to the e-voucher
system, there were uncollected inputs despite swiping by farmers. The findings also revealed lack of
an oversight committee to oversee the implementation of the programme while the administrative
structures are not clearly defined with respect to the responsibility and accountability of FISP
resources. To increase the coverage of the audit to cover the whole country, a firm of independent
auditors has been engaged and the work is currently on-going. The findings, as well as those from
the CIA will help to shape the design of the new programme. In line with its constitutional mandate,
the office of the Auditor General, will continue with annual audits to ascertain compliance.

Social Protection

67. To ensure sustained and continued protection of the poor and vulnerable, in particular
given the continued negative effects of the COVID-19 Pandemic on livelihoods, scaling up of
social protection programmes will be undertaken in 2022 and over the medium term. Specific
actions to be undertaken include:

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• Increasing the number of beneficiaries under the flagship Social Cash Transfer Programme to
over 1, 024,000 households in 2022 from 880,539 households in August 2021;

• Increasing the transfer value per household in 2022 to K200 per month from K150. For households
with a severely disabled member, the transfer value will be increased to K400 per month from
K300;

• Increasing the number of beneficiaries under the Food Security Pack Programme 7 to 290,000
households in 2022 from 263,700 in August 2021;

• Expand support to the girl child through the Keeping Girls in School Programme to 43,520 girls
in 2022 from 28,964 girls in 2021;

• Scaling up of the home-grown school feeding programme 8 from 39 to 59 districts;

• Continued implementation and scaling up of the public welfare assistance scheme 9;and women
empowerment programme 10; and

• Clear all outstanding pension arrears as at end 2021 for public service workers and eliminate the
accumulation of arrears by staying current on pension employee and employer contributions.

68. Pension Reform. The Pension system will be reformed to make it financially sustainable and
provide social security to retirees. The key reforms include creation of a statutory pension and an
occupational pension. Reform measures being considered include a complete review and
amendment of relevant legislation including Public Service Pension Fund, Local Authorities
Superannuation Fund and the Pension Scheme Regulation Act, all with the aim of providing
adequate safeguards to retirees. Government will make appropriate consultations including with
trade unions and the World Bank, as it undertakes the pension reforms.

69. The Zambia Integrated Social Protection Information System was implemented in 2021
to assist in planning, policy formulation and eliminating duplications within social protection
programmes. Further, the coverage of social health insurance, which is currently in the formal sector
has been extended to the informal sector. The registration of the informal sector to the scheme will
be a continuous process. This will be achieved by engagement with various associations which

7 The Food Security Pack (FSP) is an agricultural – based Social Protection programme that provides agriculture
inputs and accompanying services to poor and vulnerable farming household.
8
Home Grown School Feeding Programme (HGSFP) is a social safety net used to tackle the problem of malnutrition
and hunger among pupils. It is also used to help improve access and retention of pupils in schools.
9 The Public Welfare Assistance Scheme (PWAS) supports the most vulnerable in society to fulfil their basic needs
particularly health, education, food and shelter. It is aimed at mitigating social economic shocks and other negative
effects such as, poverty and the HIV and AIDS pandemic.
10
The Women Empowerment Programme offers women technical, financial and material empowerment to promote
their participation in economic and social development.

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represent the informal sector such as the marketeer’s association, door to door registration and
utilization of the Zambia Integrated Social Protection Information System for vulnerable households.
Also, informal sector players may be required to be National Health Insurance Management
Authority (NHIMA) compliant to participate in Government programmes such as FISP or Food
Security Pack (FSP).

Public Investment Management Strategy

70. In line with the Public Investment Management Strategy, the multisectoral public
investment board will scrutinize investment proposals prior to inclusion in the budget. All
projects will be required to undergo project appraisal, including cost effectiveness reviews. This will
inform costs to be included in the budget and inform prioritization criteria. Further, MPSAs will be
required to develop projects whose objectives, outputs and indicators are in line with National
Development Plans, Sectoral plans, Provincial, District Development Plans and Cabinet directives.
Projects that are not aligned with the aforementioned requirements will not receive necessary
approvals for project development and implementation.

71. While capital projects will be budgeted within the approved budget ceilings by MPSAs,
comprehensive criteria will be developed on the selection and prioritisation of projects to be
included in the Budget. At implementation stage, and following a successful appraisal process, the
Public Investment Planning Department (PIPD) in the Ministry of Finance and National Planning will
oversee capital budget commitments and execution. All capital projects will be outlined in the Public
Investment Plan for the country and a database of the projects will be maintained by the PIPD.

B. RESTORING DEBT SUSTAINABILITY AND IMPROVING DEBT MANAGEMENT AND

TRANSPARENCY

72. Zambia’s public debt is unsustainable, using both solvency and liquidity thresholds. To
address this, Government is implementing various measures targeting both external and domestic
debt which are discussed hereunder.

73. Government will implement the following external debt measures:

i. Non-contracting of non-concessional debt (continuous performance criterion, see Table 3):

Cabinet in December 2019 directed that Government halts contraction of non-concessional
public external debt. In keeping with this directive, no commercial facilities have been executed
since 2020. Government will continue the implementation of this measure until public debt
sustainability is restored. Further, Government is reviewing the contraction of concessional
debt mostly from Multilateral creditors to manage the pace of external debt accumulation
(indicative target on the present value of new external concessional borrowing);

ii. Cancellation and rescoping of external debt financed projects (IT ceiling on disbursements
on contracted but undisbursed debt): In 2020, Government undertook an exercise to cancel
and scale down some loan financed projects by $5 billion to reduce the stock of contracted but

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undisbursed loans. This exercise resulted into cancellation and re-scoping of loans amounting
to $1.1 billion and $280 million, respectively. Government has continued to review its stock of
contracted but undisbursed external commercial loans with a view to cancel an additional $2.1
billion during the 2022 fiscal year. The cancellation of $2.1 billion worth of undisbursed loans
has advanced and will imply that implementation of the affected project will have to be
financed through general budget revenues in a phased manner. As at end-December 2021, the
stock of contracted but undisbursed external debt stood at $4.02 billion. The ongoing review
also indicates that the halting of disbursements by non-multilateral creditors following
accumulation of debt service arrears, has resulted in unpaid IPCs of around $563 million 11 as at
end January 2022. Having concluded the engagements with the contractors on the
cancellation, rescoping and postponement of projects works, Government has published the
list of loan financed projects whose implementation is intended to continue (prior action, see
Table 1).

iii. Asset Liability Management exercise: Government has been working with financial and legal
advisors since July 2020 to carry out an Asset Liability Management exercise which will
culminate into restructuring of the country’s debt in order to restore debt sustainability.
Zambia is utilizing the G20 Common Framework for debt treatments beyond the DSSI, as it
provides traction in the debt restructuring effort. The country made the application to the
Common Framework in January 2021 and the Official Creditor Committee started considering
the debt restructuring exercise for Zambia on 16th June 2022. Prior to the framework coming
into effect, Zambia had made use of the Debt Service Suspension Initiative (DSSI) to obtain
debt suspension from various creditors. In view of the liquidity challenges, coupled with the
need to ensure inter-creditor equity, Government has continued to implement a debt service
standstill for creditors that did not grant Zambia DSSI with the exception of multilaterals and a
few creditors financing priority projects of high economic and social importance. Government
has continued to engage private creditors on formation of creditor groupings for the purpose
of expedited negotiations during the debt restructuring process. We are committed to
finalizing the MOU with official creditors by the time of the first program review, and reaching
agreements on comparable terms with other creditors soon after, by the time of the second
review at the latest.

iv. External arrears to contractors (continuous ceiling on the accumulation of new external debt
arrears, see Table 3). To address the arrears amounting to $563 million to contractors for works
done on non-disbursing loans, Government will clear the arrears over a ten-year period
through budgetary allocations. Fuel arrears which amounted to $597 million as at end-
December 2021 will also be cleared over the same period through budgetary allocations,
subject to the outcome of the planned audit; and

11
This is a preliminary position from most of the projects reviewed so far as the actual figure is expected to be higher
than $563 million after reviewing all the projects.

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v. Achievement of higher economic growth. This will improve the country’s revenue
mobilisation and debt carrying capacity.

74. To enhance external debt management and transparency, Government will develop a
Medium-Term Debt Management Strategy covering the period 2023-2025, subject to
finalization of the debt restructuring exercise, and an Annual Borrowing Plan for 2023 by end-
December 2022. In addition, Government has on a regular basis, been undertaking debt data
validation and reconciliation activities through engagements with its creditors in a transparent and
highly collaborative process, and provided to the IMF detailed information on all external debt
contracted or guaranteed by the public sector, for both disbursed and undisbursed debt (prior
action, see Table 1). Government has also on a regular basis published debt information in its
semiannual and annual economic reports. Government will also continue to publish on a quarterly
basis, a Debt Statistical Bulletin to cover external and domestic debt including loans contracted, new
disbursements, information on guaranteed loans and any liabilities arising out of public private
partnerships (structural benchmarks, see Table 2). Further, Government intends to expand coverage
of the bulletin to include non-guaranteed State-Owned Enterprises (SOEs) debt among others.

75. Revision of the Loans and Guarantees Legislation: To enhance transparency in debt
management, including loan contraction and provide a framework for evaluation, issuance
and monitoring of public guarantees, the Ministry of Finance and National Planning will
submit the Loans and Guarantees, Grants (Authorisation) Bill to Parliament to repeal the
current Loans and Guarantees (Authorisation) Act. The new law is expected to be enacted by the
end-September 2022 (structural benchmark, see Table 2). The revision of the law is due to the need
to align it to the Constitution which requires Parliamentary oversight on loan contraction. Further, it
aims at addressing the weaknesses in the current Act such as the definition of public debt, reporting
requirements and adherence to international best practice in public debt management. The
regulations of the Act will ensure strong oversight, recording and monitoring of all contracted debt
and guarantees.

76. Regarding domestic debt sustainability, Government will ensure that the issuance of
Government securities will be primarily from the market, i.e. issuance of treasury bills and
bonds through the auction. In addition, the issuance programme will focus on longer dated
instruments taking into account market conditions and costs, in order to reduce refinancing risk. The
target is to attain a debt stock ratio of treasury bills to Government bonds of 40 percent to 60
percent over the medium term i.e., treasury bills will be limited to 40 percent of the domestic debt
stock. Further, raising funds domestically will avoid increasing the use of instruments that are of
foreign currency denomination. Government is cognizant of the adverse impact of exchange rate
volatility on domestic debt denominated in foreign currency maturities.

77. Government commenced talks with official creditors on 16th June, 2022. The request
made to the official creditors is anchored on overcoming current debt challenges without
jeopardizing the country’s ability to rebound and fund its future development. Discussions with
creditors are grounded on the following considerations: (i) A comprehensive debt treatment,
encompassing both Government and SOEs debt, whether guaranteed or not, to achieve the objective

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of “moderate” risk rating of debt distress over the medium term; (ii) The exclusion of non-resident
holdings of T-bills and bonds (classified by the IMF as external debt) as inclusion of these
instruments within the perimeter would be a threat to financial stability, would raise multiple issues
from practical, legal and fairness considerations (if limited to non-resident holders), and would
trigger massive foreign exchange outflows and jeopardize the Government’s ability to finance the
budget; and (iii) The exclusion of short-term payables i.e. non-financial claims mostly due to
suppliers of petroleum products and contractors; however appropriate repayment terms will be
sought, recognizing the country’s difficulties.

C. STRENGTHENING FISCAL CONTROLS AND GOVERNANCE

78. Entrenching medium term fiscal sustainability requires the successful implementation
of public financial management reforms. Strengthening the Public Financial Management
Framework (PFM) is a central pillar to restoring budget credibility, improving the efficiency of public
expenditures, and supporting private sector led growth. The goals of the PFM are enhancing
domestic resource mobilization; increasing the efficiency of public expenditure; halting the
accumulation of arrears; and improving fiscal transparency. The following reforms will be undertaken
in the medium term:

i. Enhancement of Domestic Revenue Mobilisation and service delivery by effective

implementation of the Government Service Bus and Payment Gateway. A total of 82
services from Immigration Department, Zambia Police, Registrar of Societies, Patents
and Companies Registration Agency, the Road Transport and Safety Agency and
Ministry of Lands (ground rent) are already online. Substantial progress has been made
in enabling more services provided by Government Ministries and Agencies to be
provided online. The target is to bring online an additional 79 services by end-
December 2022, and more services by 2023. The interface of various Government
services will lead to interoperability of Government services and system-based controls,
which will enhance tax compliance and the management of tax debt and other arrears;

ii. Implementation of the Planning and Budgeting Act. Key objectives of the law are to
ensure that all key stakeholders are involved in the planning and budgeting process. All
major projects are appraised before being included in the short and medium-term
plans, including the annual budget;

iii. Continued enforcement of the provisions in the Public Finance Management Act and
regulations to strengthen the sanction regime for financial mismanagement.

iv. Repeal and replacement of the Loans and Guarantees (Authorisation) Act to enhance
Parliamentary oversight on loan contraction and issuance of guarantees. For defence
and security contracts, Parliament will establish a standing committee to review these
loans.

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v. Enhancement of Commitment Control in IFMIS to facilitate the capture of expenditure

arrears.

79. Budget Execution and Financial Reports. To enhance fiscal transparency, the
Government will continue with the publication of Quarterly Economic Reviews, which also
contain information on Budget performance. The financial report will continue to be published on
an annual basis. The scope for the Budget Execution Report will be expanded to include performance
on broad revenue and expenditure categories including social spending and its quality will be
improved. Government will migrate to the International Public Sector Accounting Standards (IPSAS)
Accrual Accounting Basis in 2024 based on the approved roadmap.

80. Fighting Corruption. The Zambian Government has a zero tolerance for corruption.
To this effect, disciplinary action was taken in 2021 against erring officers at the Ministry of
Health, who were involved in misappropriation of resources intended for the fight against the
COVID-19 Pandemic, including at Controlling Officer level. The cases were also reported to law
enforcement wings who have taken the cases to court. To entrench the fight against corruption, a
committee headed by the Secretary to the Cabinet regularly meets to discuss audit queries of all
affected MPAs. Where required, disciplinary action has been taken by the Secretary to the Treasury
for erring officers. In addition, with the support of the IMF, a Comprehensive Governance Assessment
is currently being undertaken and the initial diagnostic work will be completed and published by
end-December 2022 (structural benchmark, see Table 2). The final report of the Assessment will be
made public and will inform an action plan outlining future effort to strengthen governance and
reduce corruption.

81. Fiscal risks. In light of slowing growth, tighter fiscal conditions, and growing debt
burden, Government will closely monitor fiscal risks. To this end, Government is developing
a fiscal risk management framework aimed at anticipating expenditure pressures and revenue
shocks. This framework will be finalized by end-September 2022. The key elements that will be
monitored include Local Authorities, PPPs, SOEs and climate/natural disasters.

82. Public Private Partnership. To leverage the Public Private Partnership (PPP) financing mode
to finance developmental projects, while reducing the fiscal risks related to PPPs, Government will
submit to Parliament by end-June 2023, amendments to the PPP Act (structural benchmark, see
Table 2). The amendments will include provisions for the Minister of Finance and National Planning
with the mandate to approve or reject PPP projects based on potential fiscal implications. The review
of the law will also provide support for the delivery of cost effective, value for money, and
sustainable infrastructure projects and service delivery as a means to stimulate economic recovery. In
addition, Government will take a proactive stance in risk management of PPPs to avoid or minimize
the incurring of contingent liabilities from PPP projects. This will be supported by the finalization,
implementation of and adherence to the fiscal commitment and contingent liabilities guidelines.

83. SOEs. Government has been implementing various measures aimed at strengthening fiscal
control and governance of State-Owned Enterprises (SOEs). These include enactment of the Public
Finance Management Act No. 1 of 2018 and development of an SOE Policy. The Act gives the

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Treasury mandate to develop the code of governance guidelines and a supervisory and performance
monitoring framework for SOEs. Additionally, it requires SOEs to submit to the Treasury annual
financial statements for analysis of performance. Further, Ministry of Finance and National Planning
will be preparing periodic reports with an in-depth analysis on the health of SOEs. Where an SOE’s
performance is poor, the Act empowers the Treasury to take appropriate action. Government has
also drafted an SOE Policy that is envisaged to strengthen governance of these institutions. Cabinet
approval of the Policy will be done by end-September 2022.

84. Further, the IDC has continued to put in place controls to ring-fence the Treasury from
the operations of SOEs under its portfolio. Measures instituted include limiting the contracting of
debt financing by only permitting commitments for areas where a business case exists, and where
debt is serviceable from incremental cash flows to be derived from the debt. In addition, IDC will roll
out the Group Treasury Management Policy which provides a framework for prudent treasury
management, efficient capital allocation and best practice reporting.

D. ENHANCING MONETARY POLICY

85. The Bank of Zambia will continue to rely on the forward-looking monetary policy
framework anchored on the Policy Rate as a key signal for the monetary policy stance.
Decisions on the policy rate will continue to be guided by inflation forecasts, outcomes, and
identified risks that include those associated with financial stability and economic growth. The Bank
will make effective use of open market operations, as well as enhance competition, transparency, and
protection of consumers in financial markets. Overall, monetary policy will focus on bringing inflation
back to the 6-8 percent target range by mid-2023. The unwinding of the accommodative monetary
policy measures implemented in 2020 to mitigate the adverse effects of the pandemic will continue,
as conditions allow and in the context of the overall review of credit quality and health of the
financial sector.

86. The Bank will continue to pursue measures aimed at deepening the secondary market
for Government securities. These measures include developing and implementing simplified
registration of accounts and investing in Government securities. This is expected to contribute to
wider participation by different categories of investors, particularly households. In this regard, the full
rollout of the Bloomberg E- Bond platform for secondary trading which was envisaged by the end of
the first quarter 2022 has been extended to the fourth quarter of 2022 to allow for the inclusion of all
key market players. Effective implementation of the platform is expected to contribute to greater
transparency in pricing and therefore improve secondary market liquidity for participants. In general,
the broadening of investor participation, that results in improved price discovery, is expected to
strengthen the interest rate channel of monetary policy transmission.

87. The Bank will also introduce, on a pilot basis initially, a Credit Guarantee Fund (CGF)
which will leverage private sector participation to support the provision of affordable credit to
MSMEs. Prior to the COVID-19 Pandemic, MSMEs already faced high information costs and credit
risks (both real and perceived). This was exacerbated by the pandemic, with MSMEs bearing the
burden of adjustment and were not the predominant beneficiaries under the TMTRF. The pilot will

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take into account the need to encourage environmentally sustainable growth. It is anticipated that
the initial amount of the CGF will be K3 billion, including administrative costs.

88. To ensure its operational independence and thereby enhance monetary policy
credibility, the Bank has completed a review of the Bank of Zambia Act No. 43 of 1996. The bill
has been submitted to Parliament (prior action). Two main issues emerged that precipitated the
review of the Act. These are the enactment of the Constitutional (Amendment) Act No.2 of 2016 and
the adoption of the SADC Central Bank Model Law by the Council of Ministers of Finance in 2009.
Article 213(1) of the Constitution (Amendment) Act No. 2 of 2016 establishes the Bank of Zambia as
the Central Bank of Zambia and Article 213 (5) provides for the operational independence of the
Bank of Zambia. In this regard, the proposed amendments to the Bank of Zambia Act are based on
three main principles: (1) operational, financial, and personal autonomy for the Central Bank as
enshrined in the Constitution of the Republic of Zambia; (2) strengthening its mandate; (3) corporate
governance in line with best practices; and (4) enhancing Central Bank transparency and
accountability. The Bill has provided for the establishment of the Monetary Policy and Financial
Stability Committees. The Monetary Policy Committee shall be responsible for the formulation of
monetary policy while the Financial Stability Committee shall superintend over the formulation of
macro-prudential policies aimed at achieving and maintaining financial stability. To enhance
accountability and transparency, the Reports of the Committees will be published. The Bill was
presented to Parliament and is pending Presidential assent.

89. The primary objective of the exchange rate policy is to maintain a flexible system
whilst mitigating excessive volatility, which can undermine the achievement of the Bank’s
inflation objective. The Bank of Zambia is also committed to building international reserves to
provide a level of confidence to the market that the country can meet its current and future external
obligations. In this vein, the Bank of Zambia will step up monitoring of foreign exchange flows and,
to help build up foreign exchange reserves, mining companies will continue to pay all tax obligations
directly in U.S. dollars and through the Bank. The Bank will in addition continue with the gold
purchase programme with a target of at least 783.8kg of refined gold for 2022. Further, the Bank will
review foreign exchange market rules and policies, with a view to normalizing policies as market
pressures continue to abate. The review will focus particularly in areas that support efficiency in price
discovery, transparency in trading, and promotion of a well-functioning market.

E. SAFEGUARDING FINANCIAL STABILITY

90. To improve its surveillance capacity of the banking sector, given the challenging
macroeconomic environment, which was worsened by the COVID-19 Pandemic, the Bank of
Zambia has developed a Problem Bank Framework. The Framework was approved by the Board
at its second quarter meeting held in May 2022.The key goals of this framework include: providing
clear and consistent criteria for designating an institution as a problem institution; clearly defining
the actions, both pre-emptive and after a problem has crystalized, to be taken in dealing with weak
institutions; and minimizing the risk of economic and financial contagion and their potential fiscal
risks. The Bank has also been working on enhancing off-site analysis to better align it to the risk-

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based supervision framework. As part of this process, the Bank has revised the templates and
conducted a pilot of the enhanced returns. The launch of the new Returns is expected in quarter
three 2022. In 2022, the Bank plans to conduct thematic examinations on asset quality, which will
include restructured facilities due to the COVID-19 Pandemic. In addition, the examination will review
the facilities granted under the TMTRF to validate whether the Financial Service Providers (FSPs)
extended the credit on agreed terms and conditions and draw lessons for the future. The thematic
on-site examinations commenced in April 2022 and are expected to be concluded by end-December
2022 (structural benchmark, see Table 2).

91. As part of its 2020-2023 Strategic Plan, the Bank of Zambia is working to strengthen
micro-prudential regulation and supervision. In this regard, a micro-prudential stress testing
framework has since been developed. The Framework will be used to assess the resilience of
individual financial institutions and expected to be implemented by December 2022. Further, the
Bank of Zambia has initiated a supervisory technology project to improve the analytical capabilities
of staff and timeliness of analysis as well as data integrity by December 2023. To enhance cyber
resilience, the Bank of Zambia has developed Cyber and Information Security Guidelines. The Bank
has since completed the regulatory impact assessment. The process also benefited from IMF-
AFRITAC South under the AFRITAC Cyber Security Technical Assistance. The Guidelines will be issued
by the end of quarter three 2022.

92. The Bank of Zambia will undertake a review of the banking sector to prepare for the
post-COVID-19 Pandemic period, including unwinding of the prudential measures taken.
The review will assess the effectiveness of the banking sector in playing its key role of financial
intermediation during the pandemic, as well as the impact of the COVID-19 Pandemic on the banks’
capital and on systemic risks in general, and will incorporate the planned thematic examination of
asset quality. The review will also include an assessment of the implications of increased
digitalization of the economy and developments in the payment systems on bank competition and
more broadly on financial sector development. The Bank of Zambia will unwind the prudential
measures taken to address the COVID-19 pandemic in accordance with the timelines indicated when
they were introduced and as financial conditions allow. These measures largely provided relief to
FSPs on the impact of the COVID-19 pandemic on regulatory capital and all had specific termination
dates. Some of the key measures included relief on: (i) IFRS impairment losses up to December 31,
2022; (ii) impairment losses on restructuring of existing credit facilities for bank funded facilities for
one year up to March 31, 2021. However, in view of the evolution of the pandemic, this measure was
not unwound and will be reviewed as part of the planned thematic examination in 2022; and (iii)
impairment losses on restructuring of facilities granted under the TMTRF for the periods of the
facility, which range from three years to five years.

93. As part of the safety net arrangements, the Bank of Zambia will implement a Deposit
Protection Scheme through a dedicated unit to be established by end-September 2022.
The unit will initially fall under the Bank Supervision Department with a view of establishing a fully-
fledged separate department once it is ready to operate independently. The Bank of Zambia has
developed directives to operationalize the Scheme. Further, a crisis management and resolution

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framework has been established, which will be fully operational once the governance arrangements
have been finalized as provided for in the new Bank of Zambia Act.

94. The Bank of Zambia is also working to enhance its macro-prudential surveillance
framework. A macro-prudential toolkit aimed at mitigating the buildup in excessive credit growth
and leverage, maturity mismatches and market illiquidity, exposure concentration, and moral hazard,
due to misaligned incentives has been developed. The identified macro-prudential tools will be
operationalized within the 2020-23 strategic planning cycle. Further, regulations and guidelines for
the use of countercyclical capital buffers and loan-to-value ratio as well as buffers to manage
domestic systemically important banks will be developed in line with annual operational plans.
The conduct of macro stress tests to ascertain the resilience of the system will continue.

95. The Bank of Zambia will establish and resource a dedicated AML/CFT/PF 12 supervision
unit to address the deficiencies identified in the 2019 ESAAMLG 13 Mutual Evaluation, 2022
Enhanced Follow-Up Report, and Zambia’s 2016 National Risk Assessment. In the interim, risk-
based AML/CFT focused on on-site examinations are being conducted. The establishment of the
dedicated AML/CFT/PF unit will support the BoZ’s risk-based approach to AML/CFT/PF supervision
and the effective application of sanctions, in particular for identified high-risk entities and customers
including politically exposed persons.

F. ACHIEVING HIGHER AND MORE INCLUSIVE GROWTH

96. The goal of the Government’s economic policies is to raise living standards, and reduce
poverty and inequality by creating conditions for strong and inclusive growth. These objectives
rest on economic transformation and job creation through implementation of interventions to
enhance production and productivity in the agriculture, tourism, mining, manufacturing, energy and
transport sectors. Improving the investment climate will be crucial in promoting productivity in these
sectors.

97. Agriculture. The agricultural sector will continue to be a key driver of growth and job
creation for the Zambian economy. The focus will be on addressing the challenges faced by the
sector, which include low production and productivity, dependence on rain-fed farming, limited crop
diversity, and restrictions on agriculture exports. The frequency and intensity of climate event has
also adversely affected the sector.

98. To reduce dependence on rain fed agriculture and to promote all year-round
production as well as responding to climate change events, Government will continue with
irrigation infrastructure development at Chiansi in Kafue District, Mwomboshi in Chisamba,
Musakashi in Mufulira and Lusitu in Chirundu. All these projects are at (or above) 80 percent
completion, and will bring in excess of 3,000 hectares of land under irrigation, mainly for small scale

12
Anti-Money Laundering/Counter Financing of Terrorism/Proliferation Financing.
13
Eastern and Southern Africa Anti-Money Laundering Group.

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farmers. To Increase area under cultivation and promote out-grower schemes, development of farm
blocks will be prioritised beginning with Nansanga Farm Block 14 whose works are scheduled to begin
by mid-2022. To improve productivity through mechanization, tax incentives have been provided in
the 2022 Budget on selected agricultural equipment and accessories, such as manure spreaders,
combined harvesters and commercial sprinkler irrigation systems. In the livestock sub-sector,
Government will recruit extension officers, provide training in open grazing management and
continue animal disease prevention and control programmes. In the fisheries sub-sector,
strengthening monitoring and fisheries conservation efforts in the natural water bodies will be
prioritized in the short to medium-term. Further, establishment of additional hatcheries and
completion of other infrastructure such as aquaculture parks will compliment private sector efforts to
increase fish production.

99. Tourism. In the Tourism sector, Government will develop other parts of the country by
establishing the necessary infrastructure and regulatory framework that will make them attractive for
the private sector to establish hotels, lodges and other tourism facilities. Strategic investments will be
made in the Northern Tourism Circuit to fully exploit the tourism potential in the region.
Development partners and other stakeholders have been engaged to undertake studies with a view
to launching some tourism related projects in 2022.

100. Manufacturing. With enhanced support, manufacturing can contribute more to economic
transformation and job creation. Government will support value addition to products from the
agriculture, forestry and mining sectors. Government will reinvigorate the programme of Multi-
Facility Economic Zones (MFEZs) and industrial parks. To ensure the success of the MFEZs,
Government working with cooperating partners will undertake an assessment of the MFEZs so as to
draw lessons from past implementation and programme design going forward. To reduce the cost of
doing business, Government will rationalize the number of licenses and permits required to operate
a business. Further, Government will take advantage of market opportunities presented by
neighbouring countries such as the Democratic Republic of Congo (DRC) as well regional and
continent-wide initiatives such as the Tripartite Free Trade Agreement and the Africa Common Free
Trade Area (AfCFTA). Export duty on maize and maize products was lifted in November 2021, and
exports have since commenced to the DRC.

101. Energy. Energy is a critical catalyst in restoring growth and achieving economic
diversification. Therefore, implementation of reforms to improve efficiency and enhance the sector’s
support to growth will be undertaken. Key reforms to be undertaken include finalization and
publication of the multi-year tariff adjustment framework by end-December 2022 (structural
benchmark); implementation of revised tariffs with Independent Power Producers to give financial
stability to ZESCO by end-December 2022; and development of regulations for open market access
to give an opportunity for other off-takers other than ZESCO by end-December 2022. Further,
Government intends to shift focus towards renewable energy sources such as solar and geo-thermal

14
A farm block is a dedicated land under the control of the processor (anchor farmers), that achieves the goal of small
holder inclusiveness in the supply chain.

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and less dependence on fossil fuels. The Government’s commitment under the country’s Intended
Nationally Determined Contribution (INDC) to the 2015 Agreement on climate change is to reduce
emissions by 47 percent by 2030 using 2010 as the base year.

102. Mining. To ensure predictability and in turn create sustained investment in the sector,
Government reviewed the mining tax policy framework with a view to introduce a more stable
mining tax regime. The first step was reintroduction of the deductibility of mineral royalties for
income tax purposes in 2022. In the medium-term, Government will amend the law so that mineral
royalty determination reflects a measure of both incremental and aggregate norm values. This is
aimed at attracting investment into the sector. Government will also implement strategies aimed at
increasing production at mining companies where it owns a significant stake. To facilitate green field
investments, geological mapping of the country will be intensified to cover the whole country from
the current coverage of 70 percent over the medium term. Further, value addition will be enhanced
by facilitating investments in processing and refining capacity for minerals by 2023. Stumbling blocks
to these investments by the private sector, including mining companies are being addressed.
Government will also dismantle the backlog of VAT Refunds to mining companies. Formalisation
of the largely informal small mining sub-sector will be promoted through the establishment of
cooperatives and trading centers in 2022.

103. Enhancing resilience to climate shocks. Climate change remains a significant threat to
Zambia’s sustainable development. To demonstrate Government’s commitment towards climate
resilience and low carbon development, a Ministry of Green Economy and Environment, dedicated to
champion the development of a green economy and a sustainable environment has been created by
the Government. The work of the ministry will involve mainstreaming climate change adaptation and
mitigation across all policy and programme interventions to build the resilience and promote low
carbon development of the economy. Government will also develop legislation on climate change to
strengthen its response to this challenge. In addition, a National Climate Change Fund will be
established to spearhead resource mobilisation. As a Party to the United Nations Framework
Convention on Climate Change (UNFCCC), the Kyoto Protocol as well as the Paris Agreement,
Zambia attended the COP26 in Glasgow, Scotland in November 2021, where the country committed
to reduce emissions by 25 percent based on its domestic resources and the level of support it
received in 2015, but indicated its willingness to reduce its emissions even further up to 47 percent
with substantial support from advanced economies.

104. Human Development. Government will continue implementing policies and strategies
aimed at enhancing human development. To this end, budgetary allocations were increased in
education and health in the 2022 budget, including to support the increased hiring of teachers and
health workers. Government has also extended the free education policy to include secondary
schools and early childhood education other than primary school education in 2022.

105. Government has taken additional resources closer to the people through the
Constituency Development Fund. These resources will be used for implementation of community-
based projects, empowerment funds for youth and women as well as bursaries for secondary and
skills training. Of the total of K4 billion allocated for the CDF in the 2022 National Budget, 60.1

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percent of the resources have been targeted for community-based projects, 20.1 percent for
empowerment programmes and 19.8 percent for secondary schools and skills training bursaries.
Sector Ministries will continue to provide policy direction and expert advice in the implementation of
CDF financed activities.

106. Girls and Women Empowerment. Government remains committed to girls and women
empowerment. In this regard, the Girls’ Education and Women’s Empowerment and Livelihood
(GEWEL) Project will continue to be implemented. The project will help keep more than 43,000 girls
in school, while more than 129,000 women will be empowered. The GEWEL project will be
complimented by financing for women empowerment programmes under the CDF.

107. Financial inclusion. Government’s commitment to enhancing financial inclusion has been
articulated in the National Financial Inclusion Strategy (2017- 2022). The key target of the Strategy is
to increase overall financial inclusion (both formal and informal) from 59 to 80 percent and informal
financial inclusion from 38 to 70 percent by 2022. To achieve this target, the Government in
collaboration with the Bank of Zambia, financial sector regulators and international partners has
undertaken the following measures:

i. Enacted legislation to enhance the provision of digital financial services, secured

transactions using movable assets, data protection for borrowers and the regulation of
credit reporting agencies;

ii. Migrated government-to-person and person-to-government payments to digital

platforms;

iii. Implemented the National Financial Switch (NFS), which has resulted in enhanced
interoperability of digital financial services; and

iv. Implemented a gender based supply-side financial inclusion data framework.

108. The 2020 FinScope Survey findings indicated that financial inclusion increased to
69.4 percent in 2020 from 59.3 percent in 2015. Consistent with this, formal financial inclusion
rose to 61.3 percent in 2020 from 38.2 percent 2015. This growth was mainly attributed to policy
interventions and reforms in the financial sector that led to increased uptake of mobile money
services to 58.5 percent in 2020 from 14.0 percent in 2015.

109. In the medium term, Government is committed to improve access to affordable finance
for farmers, agribusinesses, MSMEs and exporters of high value agricultural products. Financial
inclusion interventions will also focus on increasing access to finance for the rural population, women
and children primarily through the promotion of digital financial services. Interventions will also
include enhancement of financial consumer protection and capability by strengthening the
regulatory capacity of financial sector regulators and the establishment of an external dispute
resolution mechanism (Financial Ombudsperson). The implementation of the financial inclusion

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objectives will continue to be coordinated through the NFIS Steering Committee chaired by the
Ministry of Finance and National Planning.

IV. ECONOMIC STATISTICS

110. Government will continue strengthening data collection and estimation of key national
economic statistics such as GDP and employment. The focus will be on, developing cost effective
instruments and methods for the collection of data such as enhancement of online data collection.
This is in line with the Second-Generation Strategy for the Development of Statistics (NSDS2). The
strategy is sector inclusive and is one of the tools for the development of statistical systems in all
sectors of the economy. Overtime, all Ministries, Provinces and other Agencies (MPAs) will be
required to establish functional Statistics Units as well as Management Information Systems, with the
view to strengthen sector capacities to produce statistics from administrative records.

111. The Census of Population and Housing will be undertaken in August 2022 to provide
statistics on Zambia's population and housing stock. To update the national accounts, the
Zambia Statistics Agency will rebase the national accounts to 2015, from the current estimates which
use 2010 as the base year, by end 2024. Further, the Ministry of Finance and National Planning will
continue with the timely publication of fiscal and debt statistics on its website. The Bank of Zambia
will also continue with the publication of monetary and financial statistics.

112. The Bank of Zambia will strengthen the electronic Balance of Payments (e-BoP)
monitoring system by extending its coverage to all BoP transactions and enhancing
collaboration with other Government regulatory agencies. The Bank of Zambia has gradually
improved the compilation of external sector statistics by strengthening the regulatory framework
requiring the submission of statistics, conducting the private capital flows survey, and implementing
the e-BoP monitoring system. This has enabled the publication of the BoP and International
Investment Position (IIP) statistics on a regular basis. The e-BoP currently requires all authorized
foreign exchange dealers (primarily commercial banks) to report foreign exchange receipts and
payments of their clients. This is provided for under section 40A of the Bank of Zambia (Amendment)
Act of 2013. 15 There will be no restrictions on the use of foreign exchange, outside existing
restrictions relating to AML/CFT/PF obligations. However, significant gaps remain in the coverage of
external sector statistics, particularly the estimates of balances held abroad by resident enterprises,
and the capture of all export earnings and other current as well as financial account flows.

113. Gaps related to unidentified flows were identified in the compilation of balance of
payments statistics; these are largely attributed to the accumulation of foreign assets by the
private sector. To understand the nature of these flows, the Bank is conducting a detailed review of
available data sources with the support of technical assistance (TA) from the IMF. The TA has
examined existing mining sector statistics across various data sources, which include: the electronic
balance of payments monitoring system (e-BoP); private capital flows (PCF) survey; financial

15
This amendment incorporated detailed reporting requirements for Balance of Payments monitoring purposes, and
was developed under the auspices of the SADC Balance of Payments monitoring committee.

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statements; and customs data. In addition, the TA mission is supporting the preparation of flow of
funds for selected companies. This work is expected to culminate in an in-depth understanding of
the operations of the relevant sectors so as to comprehensively capture information on external
sector flows.

114. To support these improvements, a technical team comprising the Bank of Zambia and
ZRA has been established to facilitated information sharing and analysis. A detailed action plan
to implement the recommendations will be developed and implemented by end-December 2022.
The Bank of Zambia, Zambia Revenue Authority and the Ministry of Finance and National Planning
will engage the corporate sector to improve the quality of its reporting as these measures are
formulated and implemented.

V. PROGRAM MONITORING AND PHASING

115. Our programme is fully funded over the medium term. We have obtained financing
commitments from our external partners—including firm assurances for the next 12 months and
good prospects for the duration of the programme—to complement the financing provided by the
restructuring of external debt. Over the medium term, we will continue to work with our partners to
ensure we receive financing that will fully cover the financing gap for the remainder of the
programme.

116. Progress in the implementation of the policies under this programme will be
monitored through semi-annual reviews of the quantitative performance criteria, indicative
targets, and structural benchmarks in the attached Tables 2 and 3. These are defined in the
attached Technical Memorandum of Understanding (TMU), which also sets out the reporting
requirements under the ECF arrangement. The first semi-annual review will be based on data and
performance criteria at end-December 2022 and should take place on or after April 1, 2023.
The second semi-annual review will be based on data and performance criteria at end-June 2023 and
is expected to take place on or after October 1, 2023.

117. We will strengthen internal monitoring mechanisms to ensure strong programme

implementation. The Ministry of Finance and National Planning will establish a Technical Committee
that will be monitoring the programme and will be submitting monthly programme reports to the
Minister.

118. As outlined in our Letter of Intent, we intend to use half of the IMF financing as budget
support and the other half as a buffer to boost Zambia’s international reserve position. In line
with IMF safeguards policies, we will sign by end-August 2022 a Memorandum of Understanding
between the Government and the Bank of Zambia clarifying our respective roles and responsibilities
for servicing the associated financial obligations to the Fund.

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Table 1. Zambia: Prior Actions

Measure Status Macroeconomic

Rationale
1. Publish an updated MTEF revised in line with program Completed. Communicate a
objectives. credible plan for
fiscal adjustment.
2. Publish summary information on all procurement Completed. Strengthen the
contracts related to the 2021 Farmer Input Support Program transparency,
(FISP), including types of inputs the names of the companies governance, and
awarded, and the contract amounts. efficiency of public
spending.
3. Provide detailed information to Fund staff on all external Completed. Enhance debt
debt contracted or guaranteed by the public sector, for both transparency.
disbursed and undisbursed debt.
4. Publish a list of priority foreign-financed projects that the Completed. Enhance debt
government intends to continue. Government to confirm to transparency.
contractors on non-priority projects that any arrears
incurred would be subject to restructuring. Government to
confirm to IMF staff the list of priority and non-priority
projects.
5. Submit to Parliament amendments to the Bank of Zambia Completed. Strengthen the
Act, in line with IMF advice to safeguard the central bank’s independence of the
autonomy (operational and financial) and strengthen its BoZ.
governance.
6. Restore the practice of adjusting the price of petroleum Completed Contain fiscal risks
prices in line with the cost-plus pricing model, with the and reduce
pricing cycle reduced from 60 to 30 days. inefficient fuel
subsidies.
7. Publish the electricity sector cost-of-service study and To be Contain fiscal risks
government response. completed. and enhance
efficiency.
8. Publish a strategy for clearing expenditure and VAT Completed. Enhance fiscal
refund arrears, including criteria for prioritization and timing controls.
of payments, and consistent with program parameters.
9. Publish the implementing regulations for the new Public Completed. Enhance fiscal
Procurement Act, reflecting feedback from WB and Fund controls and reduce
experts. corruption risks.

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Table 2. Zambia: Structural Benchmarks

Measure Target Date Macroeconomic

Rationale
A. Fiscal measures
1. Reinstate VAT and excise taxes on fuel, adjusting End-September Eliminate implicit
fuel prices accordingly. 2022 fuel subsidies.
2. Publish the guidelines to implement the new End-December Reduce the cost of
comprehensive agricultural support program and 2022 FISP.
ensure a full migration of FISP to an electronic agrо-
input system.
3. Adopt an action plan to boost revenue collections End-October Strengthen domestic
through changes in tax policy and improvements in 2022 revenue
revenue administration. mobilization.
B. Public debt management and transparency
4. Publish a quarterly debt statistics bulletin. Quarterly (on Improve debt
an ongoing management and
basis) transparency.
5. Publish summary information on the financing Quarterly (on Improve debt
agreements for all newly contracted external loans by an ongoing management and
the general government, including new loan contracts basis) transparency.
guaranteed or new guarantees on existing loan
contracts.
6. Enact a revised Loans and Guarantees End-September Improve debt
Authorization Act. 2022 management and
transparency.
C. Public financial management
7. Ensure that at least 59 ministries, provinces, and End-June 2023 Strengthen fiscal
spending agencies (MPSAs) register all purchase governance, reduce
orders and other financial commitments in the IFMIS. corruption risks, and
prevent the
accumulation of
arrears.
8. In consultation with Fund staff, submit to End-June 2023 Strengthen the
Parliament an amended PPP Act. management of
fiscal risks related to
PPPs.
D. Public enterprises
9. Cabinet to endorse and publish a multi-year tariff End-December Limit fiscal risks and
framework and a related action plan to ensure cost- 2022 ensure medium-
reflective and sustainable electricity tariffs, term fiscal
regulations for periodic tariff reviews, and medium- sustainability of the
term policies for targeted tariff subsidies. energy sector.

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Table 2. Zambia: Structural Benchmarks

Measure Target Date Macroeconomic

Rationale
E. Governance
10. Prepare, with IMF staff’s support, and publish a End-December Identify and address
comprehensive governance diagnostic, including 2022 governance
specific recommendations and a time-bound action weaknesses and
plan for implementing them. corruption risks.
F. Financial stability
11. Undertake a comprehensive review of the health End-December Strengthen financial
of the banking sector, including to assess the impact 2022 stability.
of the COVID-19 pandemic on bank balance sheets.

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ZAMBIA
Table 3. Zambia: Quantitative Performance Criteria and Indicative Targets for 2022–23
INTERNATIONAL

(Millions of kwacha; cumulative from the beginning of the calendar year; except where indicated)1
September 2022 December 2022 March 2023 June 2023
Prog. Act. Prog. Act. Prog. Act. Prog. Act.
86 INTERNATIONAL

2
I. Quantitative Performance Criteria
1. Floor on the central government's primary balance (cash basis) -5,296 -8,533 1,644 1,866
2. Ceiling on new central bank credit to the central government3 0 0 0 0
MONETARY FUND

3. Floor on the net official international reserves of the Bank of Zambia (millions of US dollars) 2,169 2,225 2,244 2,403

II. Continuous Performance Criteria

4. Ceiling on new external debt arrears by central government, the Bank of Zambia, and ZESCO (millions of US dollars)4 0 0 0 0
5. Ceiling on the contracting or guaranteeing of new non-concessional external debt by central government, the Bank of Zambia, and
5
ZESCO (millions of US dollars) 0 0 0 0

III. Monetary Policy Consultation

MONETARY FUND

6. Average CPI inflation6

Upper outer band 17.3 17.1 15.9 14.4
Upper inner band 15.3 15.1 13.9 12.4
Mid-point 13.3 13.1 11.9 10.4
Lower inner band 9.3 8.5 8.2 8.0
Lower outer band 7.2 6.3 6.0 6.0

IV. Indicative Targets

7. Floor on the fiscal revenues of central government excluding grants and mining revenues, adjusted by the backlog of VAT refunds 55,421 74,939 20,731 44,099
8. Ceiling on the present value of new external borrowing (millions of US dollars)7 75.0 75.0 0.0 0.0
8
9. Ceiling on the disbursement of contracted but undisbursed external debt to central government and ZESCO (millions of US dollars) 205.0 205.0 200.0 200.0
10. Floor on social spending by the central government 26,560 36,022 8,551 18,103
11. Floor on the net clearance of arrears on expenditure and tax refunds 8,743 11,657 2,954 5,908

V. Memorandum Items
12. Expected public sector disbursements into the Treasury Single Account at the Bank of Zambia (millions of US dollars) 274 547 71 141
Sources: Zambian authorities; and Fund staff estimates and projections.
1
All definitions and adjustors are available in the Technical Memorandum of Understanding (TMU).
INTERNATIONAL MONETARY FUND

2
Indicative targets for March and September.
3
Without prejudice to the relevant provisions in the BoZ Act.
4
Cumulative from the date of program approval.
5
The ceiling is defined on a currency basis and will exclude non-resident holdings of local currency debt.
6
As inflation is currently outside the top of the authorities 6-8 percent policy band, asymmetric bands have been set to allow for a faster deceleration than anticipated wihtout triggering the consultation clause. It is expected that the bands will
become symmetric once inflation is close to or within the formal policy band.
7
Excludes borrowing from the IMF, IDA, and the AfDB.
8
Excludes disbursements from IDA and the AfDB.

ZAMBIA
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Attachment II. Technical Memorandum of Understanding

1. This Technical Memorandum of Understanding (TMU) defines the indicators used to
monitor the program, and reflects the understandings between the Zambian authorities and
the IMF. The TMU also defines the associated reporting requirements.

2. The exchange rates for the purposes of the program are specified in Table 1 below.

Table 1. Zambia: Program Exchange Rates

(Rates as of May 31, 2022)
Zambian Kwacha Currency units
Currency
per currency unit per US Dollar
US Dollar 17.28 1.00
GB Pound 21.71 0.80
Euro 18.46 0.94
Rand 1.10 15.67
SDR 23.32 0.74
Source: Bank of Zambia.

3. For the purposes of the program, the central government of Zambia corresponds to
the budgetary central government encompassing the activities of the national executive,
legislative, and judiciary branches covered by the national budget. Specifically, it includes
Parliament, the Office of the President, the national judiciary, all ministries, departments, agencies,
constitutional commissions, and independent offices. See Annex Table 1.

4. The fiscal year starts on January 1 and ends on December 31.

Quantitative Performance Criteria

A. Floor on the Central Government's Primary Balance (Cash Basis)

Definition

5. The floor on the primary balance of the central government will be measured from the
financing side (“below the line”) at current exchange rates and on a cash basis. Data on net
domestic financing (NDF) will be reconciled between the Ministry of Finance and National Planning
(MoFNP) and the Bank of Zambia (BoZ). The primary fiscal balance is calculated as the difference
between government primary revenue and primary expenditure. Government primary revenue
includes all tax and non-tax receipts, including external grants but excluding all interest revenue.
Primary expenditure consists of current plus capital expenditure, excluding all interest payments.

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Reporting

6. Data will be provided to the Fund, using current exchange rates, with a lag of no more
than 60 days after the test date for December test dates. For all other test dates, data should be
provided with a lag of no more than 30 days after the test date.

B. Ceiling on New Central Bank Credit to the Central Government

7. New central bank credit to the central government is defined as the change in the total
stock of outstanding loans and advances by the BoZ to the central government. It excludes:

• purchases by the BoZ of debt securities issued by the Government in the open market for
purposes of implementing monetary and financial stability policies;

• on-lending of IMF credit; and

• interest accrued on the stock of outstanding loans and advances by the BoZ to the Government,
its institutions, agencies, statutory bodies, and local authorities.

Reporting

8. The data for new central bank credit to the central government will be reconciled with
the monthly monetary survey and submitted within 25 business days of the end of the month.

9. Data submissions should include a breakdown of outstanding loans and advances, as

well as outstanding amounts of other central bank claims on the government, including debt
securities and on-lending of IMF credit.

C. Floor on the Net Official International Reserves of the Bank of Zambia

Definition

10. The net official international reserves (NIR) of the BoZ will be calculated as the
difference between its gross international reserves and official reserve liabilities.

11. Gross international reserves consist of:

• monetary gold;

• foreign currency;

• unencumbered foreign-currency deposits at non-resident banks;

• foreign securities and deposits; and

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• SDR holdings and Zambia’s reserve position with the IMF.

12. Gross international reserves exclude:

• non-convertible currencies, except for operational balances in Rand with the South African
Reserve Bank;

• any encumbered reserve assets including but not limited to reserve assets pledged, swapped
(maturing in less than one year), or used as collateral or guarantee for third-party external
liabilities;

• reserve requirements on other depository corporations’ foreign currency deposits;

• any foreign assets not readily available to or not controlled by the BoZ; and

• any foreign currency claims on Zambian residents.

13. Foreign liabilities are defined as short-term (one year or less in original maturity)
liabilities of the BoZ to non-residents, plus any outstanding use of IMF credit. Short-term
liabilities exclude liabilities with an asset counterpart that is encumbered (excluded from the asset
side as well).

14. All values not in U.S. dollars are to be converted to U.S. dollars using the program
exchange rates defined in paragraph 2 above.

Reporting

15. Daily data on net international reserves, including their components, will be reported
by the BoZ on a weekly basis, within 15 business days from the end of each week.

Adjustor

16. If the amount of public sector disbursements expected to be channeled through the
Treasury Single Account (TSA) at the BoZ falls short of the programmed amount (e.g., due to
disbursement delays), the NIR target will be adjusted downward by the amount of the
shortfall.

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Continuous Performance Criteria

D. Ceiling on New External Debt Arrears by Central Government, the Bank

of Zambia, and ZESCO

Definition

17. The performance criterion on the non-accumulation of new external debt arrears is
defined as a cumulative flow in gross terms starting from the date of program approval
(August 31, 2022), and applies on a continuous basis. External debt arrears are defined here as
debt service (principal and interest) that is overdue (taking into account any contractually agreed
grace periods) on external debt contracted or guaranteed by the central government, the BoZ, and
ZESCO with non-residents. This performance criterion does not cover arrears on debt subject to
renegotiation or restructuring.

18. External debt is defined on a residency basis. The term “debt” has the meaning set
forth in paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements,
adopted by Decision No. 16919-(20/103) of the Executive Board (October 28, 2020).

a) For the purpose of these guidelines, the term “debt” will be understood to mean a current (i.e.,
not contingent) liability, created under a contractual arrangement through the provision of value
in the form of assets (including currency) or services, which requires the obligor to make one or
more payments in the form of assets (including currency) or services, at some future point(s) in
time. These payments will discharge the principal and/or interest liabilities incurred under the
contract. Debts can take a number of forms, the primary ones being as follows:

• loans, i.e., advances of money to the obligor by the lender made on the basis of an
undertaking that the obligor will repay the funds in the future (including deposits, bonds,
debentures, commercial loans, and buyers’ credits) and temporary exchanges of assets
that are equivalent to fully collateralized loans under which the obligor is required to
repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in
the future (such as repurchase agreements and official swap arrangements);

• suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments
until sometime after the date on which the goods are delivered or services are provided;
and

• leases, i.e., arrangements under which property is provided which the lessee has the right
to use for one or more specified periods of time that are usually shorter than the total
expected service life of the property, while the lessor retains the title to the property. For
the purpose of these guidelines, the debt is the present value (at the inception of the
lease) of all lease payments expected to be made during the period of the agreement

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excluding those payments that cover the operation, repair, or maintenance of the
property.

b) Under the definition of debt set out above, arrears, penalties, and judicially awarded damages
arising from the failure to make payment under a contractual obligation that constitutes debt are
debt. Failure to make payment on an obligation that is not considered debt under this definition
(e.g., payment on delivery) will not give rise to debt.

Reporting

19. Arrears will be monitored continuously by the MoFNP, including for ZESCO, and the
BoZ. The MoFNP will immediately report to the IMF staff any new accumulation of external arrears;
otherwise, data will be compiled jointly by the two institutions, and will be reported by the MoFNP
on a quarterly basis, within 30 days from the end of each quarter.

E. Ceiling on the Contracting or Guaranteeing of New Non-Concessional

External Debt by Central Government, the Bank of Zambia, and ZESCO

Definition

20. For the purpose of the ceiling, the newly contracted or guaranteed external debt by the
central government, the BoZ and ZESCO with non-residents is concessional if it includes a
grant element of no less than 35 percent. The grant element is the difference between the net
present value (NPV) of debt and its nominal value and is expressed as a percentage of the nominal
value of the debt. The NPV of debt at the time of its contracting is calculated by discounting the
future stream of payments of debt service due. The discount rate used for this purpose is 5 percent.
Loans provided by a private entity will not be considered concessional unless accompanied by a
grant or grant element provided by a foreign official entity, such that both components constitute an
integrated financing package with a combined grant element equal to at least 35 percent. External
debt is defined as in paragraph 18 above.

21. For debts carrying a variable interest rate in the form of a benchmark interest rate plus
a fixed spread, the PV of the debt would be calculated using a program reference rate plus the
fixed spread (in basis points) specified in the debt contract. The program reference rate for the
three-month U.S. Secured Overnight Financing Rate (SOFR) is 2.38 percent and will remain fixed for
the duration of the program. The spread of three-month Euro EURIBOR over three-month USD SOFR
is -150 basis points. The spread of three-month JPY Tokyo Interbank Offered Rate (TIBOR) over
three-month USD SOFR is -250 basis points. The spread of three-month U.K. Sterling Overnight
Index Average (SONIA) over three-month USD SOFR is -50 basis points. For interest rates on
currencies other than Euro, JPY, and GBP, the spread over three-month USD SOFR is -50 basis points.
Where the variable rate is linked to a benchmark interest rate other than the three-month U.S. SOFR,
a spread reflecting the difference between the benchmark rate and the three-month U.S. SOFR
(rounded to the nearest 50 basis points) will be added. Given the ongoing transition away from

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LIBOR, once operationally feasible, this TMU can be updated to reflect the benchmark replacement
for JPY LIBOR, the Tokyo Overnight Average Rate (TONAR).

22. This minimum grant element applies not only to debt as defined in Point 9 of the
Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements
(Decision No. 6230-(79/140), as subsequently amended, including by Executive Board Decision
No. 14416-(09/91), effective December 1, 2009), but also to commitments contracted or
guaranteed for which value has not been received.

23. New non-concessional external debt is defined as any form of new debt other than
concessional debt as defined in paragraph 20 above, contracted or guaranteed by the central
government, BoZ, and ZESCO with non-residents.

24. For the purpose of this performance criteria, the ceiling on contracting or guaranteeing
of new non-concessional external debt by the central government, BoZ, and ZESCO excludes:
(i) loans stemming from the restructuring or rescheduling of external debt; (ii) central
government securities issued in domestic currency, placed in the domestic primary or
secondary markets, and held by non-residents; (iii) debt contracted from IMF, World Bank and
AfDB; iv) short-term trade credits for imports, incurred since the beginning of the calendar
year; and v) central bank debt issuance for the purposes of monetary policy or reserves
management and foreign exchange swaps for the purposes of monetary policy or reserves
management.

25. For program purposes, a debt is considered to be contracted when all conditions for its
entry into effect have been met in accordance with the terms of the contract and as provided
in the national legislation. Contracting of credit lines (which can be drawn at any time and entered
into effect) with no predetermined disbursement schedules or with multiple disbursements will be
also considered as contracting of debt.

Reporting

26. For the purposes of this PC, which will be monitored continuously, the MoFNP will
immediately report to the IMF staff details of any new external loans contracted or guarantees
issued. Otherwise, detailed data on all new external debt (concessional and non-concessional)
contracted or guaranteed by the central government, BoZ, and ZESCO will be provided by the
MoFNP on a monthly basis, within 30 days from the end of each month. The information will include
(i) amounts contracted or guaranteed; (ii) currencies; and (iii) terms and conditions, including interest
rates, maturities, grace periods, payments per year, commissions and fees, and collaterals.

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Monetary Policy Consultation Clause

27. The consultation bands apply to the average rate of inflation in consumer prices as
measured by the overall consumer price index (CPI) published by ZamStats. If the observed
quarterly average rate of CPI inflation (calculated as the average of the 3 monthly year-on-year
inflation rates within a quarter) falls outside the outer bands for June and December test dates, the
authorities will complete a consultation with the IMF Executive Board which would focus on: (i) the
stance of monetary policy and whether the Fund-supported program remains on track; (ii) the
reasons for program deviations, taking into account compensating factors; and (iii) proposed
remedial actions if deemed necessary. When the consultation with the IMF Executive Board is
triggered, access to Fund resources would be interrupted until the consultation takes place and the
relevant program review is completed. If the observed quarterly average rate of CPI inflation falls
outside the inner bands for each test date, the authorities will conduct discussions with Fund staff.

Indicative Targets

F. Floor on the Fiscal Revenues of the Central Government Excluding Grants

and Mining Revenues, Adjusted by the Backlog of VAT Refunds

Definition

28. The fiscal revenues of the central government include all tax and non-tax receipts, but
exclude external grants as well as revenues from corporate income tax on the mining sector
and the mineral royalty tax. They will also be adjusted upward (downward) by the reduction
(increase) in the backlog of VAT refunds (see paragraph 38 below).

Reporting

29. Data on fiscal revenues (cash basis) will be provided to the IMF staff, using current
exchange rates, with a lag of no more than 60 days after the test date for December test dates.
For all other test dates, data should be provided with a lag of no more than 30 days after the test
date.

G. Ceiling on the Present Value of New External Borrowing

Definition

30. This indicative target is a ceiling and applies to the present value of all new external
debt contracted or guaranteed by the central government, the BoZ and ZESCO, including
commitments contracted or guaranteed for which no value has been received. External debt is
defined as in paragraphs 18 above. The present value (PV) of new external debt is calculated by
discounting the future stream of payments of debt service (principal and interest) due on this debt

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on the basis of a discount rate of 5 percent and taking account of all aspects of the debt agreement
including the maturity, grace period, payment schedule, upfront commissions, and management
fees. In the case of loans for which the grant element is zero or less than zero, the PV is set at an
amount equal to the nominal value of the debt.

31. For the purpose of this indicative target, the guarantee of a debt arises from any
explicit legal obligation of the government to service a debt in the event of nonpayment by
the debtor (involving payments in cash or kind).

32. For the purposes of this indicative target, the ceiling excludes: (i) loans stemming from
the restructuring or rescheduling of external debt; (ii) central government securities issued in
domestic currency, placed in the domestic primary or secondary markets, and held by non-
residents; (iii) debt contracted from IMF, World Bank and AfDB; (iv) short-term trade credits
for imports, incurred since the beginning of the calendar year.; and (v) central bank debt
issuance and foreign exchange swaps for the purposes of monetary policy or reserves
management.

Reporting

33. The authorities will inform the IMF staff of any planned external borrowing and the
conditions on such borrowing before the loans are either contracted or guaranteed by the
government and will consult with staff on any potential debt management operations.

H. Ceiling on the Disbursement of Contracted but Undisbursed External

Debt to Central Government and ZESCO

Definition

34. This ceiling applies to the disbursement of contracted but undisbursed external debt to
the central government and ZESCO, and of contracted but undisbursed government-
guaranteed external debt to ZESCO. The ceiling is set based on data shared by the authorities with
staff on projected disbursements of contracted but undisbursed external debt between 2022 and
2025, after taking into account the authorities’ estimates for the cancelation and rescoping of
contracted but undisbursed external loans and applies to this list. External debt is defined as in
paragraph 18 above. Disbursements from IDA and AfDB will be excluded from this ceiling.

Reporting

35. Detailed data on disbursements of contracted but undisbursed external loans of the
central government and contracted but undisbursed external loans of ZESCO (government-
guaranteed or not) will be provided on a quarterly basis, within 30 days from the end of each
quarter, including amounts, currencies, creditors, and project names.

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I. Floor on Social Spending by the Central Government

Definition

36. Social spending is defined as central government expenditure on the Social Cash
Transfer, Food Security Pack, Empowerment Fund (Women and Youth), the Public Welfare
Assistance Scheme, Water and Sanitation, budget transfers to the Public Service Pensions
Fund, the Health Sector, and the Education Sector. It is computed on a cash basis.

Reporting

37. Data will be provided to the IMF staff, using current exchange rates, with a lag of no
more than 60 days after the test date for December test dates. For all other test dates, data
should be provided with a lag of no more than 30 days after the test date.

J. Floor on the Net Clearance of Arrears on Expenditure and Tax Refunds

by Central Government

Definition

38. Arrears on expenditure and tax refunds are defined as:

• For wages, salaries, and pension contributions: any payments outstanding after the agreed
date for payment of staff and for payroll deductions to third parties.

• For goods & services and capital spending (including contractor payments): an arrear arises
when the bill has been received and delivery verified, but payment has not been made within
the normal period per standard GRZ policy (30 days), or as stated in the supplier’s contract.

• For utilities: if unpaid for 30 days or more after receipt of invoice.

• For subscriptions and leases: amounts outstanding after the due date.

• For VAT refunds: overdue if unpaid one month after the claims were validated and approved
for payment.

Reporting

39. Information regarding central government arrears on expenditure and tax refunds will
be compiled through quarterly audits of the accounts of the ZRA and spending ministries and
agencies, conducted by the Internal Audit Department of the MoFNP. The audits will be
completed and data submitted within 90 days from the end of each quarter.

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Structural Benchmarks
40. Publish the guidelines to implement the new comprehensive agricultural support
program and ensure a full migration of FISP to an electronic agricultural input system.
This structural benchmark will be met when the action plan is adopted by Cabinet and published.
The action plan should include specific measures and a timeline for implementation.

41. Adopt an action plan to boost revenue collections through changes in tax policy and
improvements in revenue administration. This structural benchmark will be met when the action
plan is adopted by Cabinet and shared with Fund staff. The action plan should include specific
measures, their revenue impact, and an implementation timeline which is in line with program
objectives for domestic revenue mobilization.

42. Publish a quarterly debt statistics bulletin. The bulletin should contain comprehensive
statistics by currency, residency of creditors, and debt instrument for general government debt
(including guaranteed debt), the debt of non-financial public enterprises (including non-guaranteed
external debt), and contracted but undisbursed debt. The bulletin should be published within 90 days
of the end of each quarter.

43. Publish summary information on the financing agreements for all newly contracted
external loans by the general government, including new loan contracts guaranteed or new
guarantees on existing loan contracts. The summary information should include at a minimum
amounts, beneficiary, use of proceeds, interest rate, maturity, grace period, and be published within
90 days of the end of each quarter.

44. Enact a revised Loans and Guarantees Authorization Act. The revised Act should
establish, in line with Fund advice: i) a clear definition of public debt; ii) a comprehensive
institutional scope and debt instruments coverage; iii) timely publication of the medium-term
debt strategy, annual borrowing plan, and annual evaluation reports; iv) a robust framework
for, managing government guarantees, and mitigating associated risks; v) well-defined
institutional arrangements; and vi) a sound transparency and accountability framework.

45. Ensure that at least 59 ministries, provinces, and spending agencies (MPSAs) register all
purchase orders and other financial commitments in the IFMIS. This structural benchmark will be
met when all of the following conditions have been met: (i) MoFNP has regulations in place that
require all commitments where government has a legal obligation to make expenditures at a future
date (including contracts signed or purchase orders issued) to be entered into the IFMIS at the time
when those commitments are made; (ii) the commitment module in the IFMIS is functional at 59
MPSAs or more; and (iii) those MPSAs are using the system to systematically enter all commitments
as they are made. MoFNP will verify (iii) above through quarterly reviews, whereby total
commitments, expenditures, and arrears will be compared to those registered in IFMIS.

46. In consultation with the IMF staff, submit to Parliament an amended PPP Act.
The amended act should strengthen the framework for managing the fiscal risks related to PPPs,

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including by establishing a clear and comprehensive definition of PPP projects, providing the
Minister of Finance and National Planning with the mandate to approve or reject PPP projects based
on potential fiscal implications, and requiring public disclosure of key risks and fiscal implications of
proposed PPP projects and awarded PPP contracts.

47. Cabinet to endorse and publish a multi-year tariff framework and a related action plan
to ensure cost-reflective and sustainable electricity tariffs, regulations for periodic tariff
reviews, and medium-term policies for targeted tariff subsidies. The package should include
timelines for implementation and be based on the cost-of-service study and the integrated resource
plan.

48. Undertake a comprehensive review of the health of the banking sector, including to
assess the impact of the COVID-19 pandemic on bank balance sheets. This structural benchmark
will be met when the BoZ completes a comprehensive internal review of the banking sector
(including an action plan for the unwinding of the prudential measures taken to address the COVID-
19 pandemic, as financial conditions allow) and an asset quality review as part of the planned
resumption of on-site inspections of financial institutions.

Monitoring and Reporting Requirements

49. To facilitate the monitoring of the program, the information listed in Annex Table 2
below will be reported to the IMF staff within the timeframe indicated. These data will be
provided electronically by email to AFRZMB@IMF.ORG.

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Table 1. Administrative Units Comprising the Budgetary Central Government

Office of the President - State House
Office of the Vice President
National Assembly
Electoral Commission of Zambia
Civil Service Commission
Office of the Auditor General
Cabinet Office - Office of the President
Teaching Service Commission - Office of the President
Zambia Police Service Commission
Zambia Police Service
Office of the Public Protector
Ministry of Mines and Mineral Development
Ministry of Home Affairs and Internal Security
Drug Enforcement Commission
Ministry of Foreign Affairs and International Cooperation
Judiciary
Disaster Management and Mitigation Unit
Local Government Service Commission
Ministry of Information and Media
Public Service Management Division
Ministry of Local Government and Rural Development
Zambia Correctional Services
Ministry of Justice
Ministry of Commerce, Trade and Industry
Human Rights Commission
Ministry of Small and Medium Enterprise Development
Zambia Correctional Service Commission
Ministry of Finance and National Planning
Smart Zambia Institute
Ministry of Labor and Social Security
Ministry of Water Development and Sanitation
Ministry of Green Economy and Environment
Ministry of Infrastructure, Housing and Urban Development
Ministry of Energy
Ministry of Technology and Science
Ministry of Tourism
Ministry of Youth, Sport and Arts
Ministry of Defense
Zambia Security Intelligence Services - Office of the President
Ministry of Education
Ministry of Lands and Natural Resources
Ministry of Fisheries and Livestock
Anti-Corruption Commission
Muchinga Province
Ministry of Agriculture
Lusaka Province
Copperbelt Province
Central Province
Northern Province
Western Province
Eastern Province
Luapula Province
North-Western Province
Southern Province

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Table 2: Reporting Requirements

Data Data Reporting
Description Freq. Agency Freq. Date
Monetary and financial sector
1. Reserve money and its components (NDA and NFA) at current and D BoZ W T15
program exchange rates
2. Excess reserves D BoZ M T15
3. Overnight interbank rates D BoZ W T15
4. Treasury bill and BoZ bill auction results W BoZ W T15
5. Interest rates M BoZ M T15
6. Holdings of government and BoZ securities by maturity and type of M BoZ M T15
investors (local commercial banks, non-banks, and foreigners)
7. Monetary survey (incl. the BoZ and ODC surveys) M BoZ M T15
8. Financial soundness indicators by bank M BoZ M T15

External sector
9. Exchange rates D BoZ W T15
10. Gross international reserves and foreign exchange purchases and D BoZ W T15
sales
11. BoZ FX cash flow M BoZ M T15
12. FX backlog W BoZ M T15

Fiscal
13. Net domestic financing D BoZ W T7
14. Fiscal table including revenue, expenditure, and financing M MoFNP M T30
15. Social spending Q MoFNP Q T30
16. Stocks of arrears on expenditure, tax refunds, and domestic debt Q MoFNP Q T90
service

Real sector
17. Consumer price index and monthly statistical bulletin M ZamStats M T15
18. National accounts BA ZamStats BA Mar. 15
Sep. 15
External debt
19. New external loans contracted or guaranteed by the central Q MoFNP Q T30
government, BoZ, and ZESCO, or any other agency on their behalf,
with detailed information on the amounts, currencies, terms,
conditions, and purposes.
20. Disbursements of contracted but undisbursed external loans to the M MoFNP Q T30
central government and contracted but undisbursed external loans
to ZESCO (government-guaranteed or not)

Program monitoring
21. Report on program performance Q MoFNP Q T90
D = Daily, W = Weekly, M = Monthly, Q = Quarterly, BA = Bi-annual, A = Annual; TX = X days after the date of the last
observation

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REQUEST FOR AN ARRANGEMENT UNDER THE EXTENDED
August 9, 2022 CREDIT FACILITY—DEBT SUSTAINABILITY ANALYSIS

Approved By The Debt Sustainability Analysis (DSA) was prepared by the

Costas Christou (AFR) staffs of the International Monetary Fund and the
and Martin Cerisola (IMF) International Development Association in consultation with
and Asad Alam and the authorities.
Marcello Estevão (IDA)

Zambia: Joint Bank-Fund Debt Sustainability Analysis

Risk of external debt distress In debt distress
Overall risk of debt distress In debt distress
Granularity in the risk rating Unsustainable
Application of judgment No

Even before the COVID-19 pandemic, Zambia’s debt burden indicators had deteriorated relative
to the July 2019 DSA. The fiscal and external positions had worsened further, reflecting
continued high public investment spending and a collapse in growth due to a drought, and the
exchange rate had weakened. The impact of the COVID-19 pandemic exacerbated these fiscal
and external imbalances in 2020—with the economy estimated to have contracted by 2¾
percent, the exchange rate depreciating by 50 percent y/y, and an unmet external financing
need of 7¼ percent of GDP financed through the accumulation of arrears—further increasing
debt vulnerabilities. These imbalances continued in 2021, with a further accumulation of arrears
to reach 10 ½ percent of GDP. The authorities hired financial and legal advisors in mid-2020 to
help devise a comprehensive debt restructuring strategy, and requested a temporary debt
service standstill from all external creditors. 1 Nonetheless, amidst severe liquidity shortages and
burgeoning budget arrears, Zambia was unable to avoid the accumulation of arrears on
external debt, culminating in a default on Eurobonds in November 2020. Absent deep debt

1
The Zambian government requested debt relief through the G20 Debt Service Suspension Initiative (DSSI), as well
as a deferral of debt service payments from all official and commercial external creditors. In accordance with this,
they signed an MOU with Paris Club creditors that extended through end-2021, and are treating all other external
creditors comparably, with the exception of multilaterals and a few earmarked priority projects. Their solicitation of
consent to Eurobond holders was rejected by bondholders on November 13, 2020.
ZAMBIA

restructuring and significant fiscal adjustment, Zambia’s public debt is unsustainable. Under the
baseline, all four external debt burden indicators would breach their indicative thresholds by large
margins throughout the medium term. 2 In light of these challenges, the Zambian government has
requested a debt treatment under the G20 Common Framework (CF).

Debt Coverage

1. The public debt definition used in this DSA covers central government direct and
guaranteed debt (including expenditure arrears), the nonguaranteed external debt of a fiscally
important state-owned enterprise (SOE), and the guaranteed and nonguaranteed domestic and
external arrears of the same enterprise.

• This is a broader debt metric than the authorities’ official debt definition which, as in many other
developing economies, covers the central government direct and guaranteed debt only, as well
as budget expenditure arrears. Using the authorities’ definition, total public and publicly
guaranteed (PPG) debt stood at $23.6 billion (150 percent of GDP) at end-2020 and is projected
to stand at $32.1 billion (126 percent of GDP) at end-2021.

• The nonguaranteed external debt of the financially challenged state-owned utility company—
ZESCO—is included in the debt perimeter for DSA purposes, given the significant fiscal risks
posed by the company and in accordance with the LIC-DSF Guidance Note. 3 These contingent
liabilities to the central government are expected to add $139 million (or 0.5 percent of GDP)
to the external debt stock by end-2021. 4 Furthermore, given the mounting risks posed
by ZESCO’s outstanding payables to domestic and external independent power producers (IPPs),
estimated at $1.56 billion at end-December 2021 (all FX-denominated), these are also included:
$161 million owed to nonresident IPPs on the external side, and about $1.40 billion owed
to resident IPPs on the domestic side. The authorities are taking steps to restore ZESCOs’
financial viability over the medium term, including a commitment to gradually move to cost-
reflective tariffs, ongoing efforts to renegotiate power purchase agreements, and steps to
improve operational efficiencies and rationalize assets. As progress is made, the inclusion of the
non-guaranteed debt in the DSA debt perimeter will be reassessed.

2
Zambia’s debt-carrying capacity is currently rated as low based on the composite indicator (CI). As a result, the
external debt burden thresholds for Zambia are (i) 30 percent for the PV of debt-to-GDP ratio; (ii) 140 percent for the
PV of debt-to-exports ratio; (iii) 10 percent for the debt service-to-exports ratio; and (iv) 14 percent for the debt
service-to-revenue ratio.
3
ZESCO and other SOEs’ guaranteed debt has always been included in DSAs and is now also part of the authorities’
officially published debt metric. ZESCO’s contingent risks to the sovereign relate to its persistent and large cash
deficits. See Guidance Note on the Bank-Fund Debt Sustainability Framework for Low Income Countries, 2018,
https://www.imf.org/en/Publications/Policy-Papers/Issues/2018/02/14/pp122617guidance-note-on-lic-dsf.
4
Given ZESCO’s operating losses and large arrears position, no net income for the company is included in the DSA,
with any positive net income in the medium term assumed to pay off IPP arrears.

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• The authorities reported no other outstanding nonguaranteed external debt of nonfinancial

SOEs that staff consider to pose a contingent fiscal risk warranting inclusion in the DSA. 5
However, an additional 10 percent of GDP has been added to the standard SOE shock in the
contingent liability stress test to account for risks stemming from foreign currency-denominated
domestic debt of SOEs, as well as potential risks arising from the acquisition of the Mopani mine
by ZCCM-IH, a majority state-owned investment holding company. 6

• The stock of arrears owed to fuel distributors and suppliers stood at $467 million at end-2020,
and grew to $597 million by end-December 2021. These are owed to nonresident entities and
are thus included as external debt in the DSA.

• As of end-December 2021, arrears amounting to $563 million had also accrued to external
contractors for services delivered on foreign-financed capital investment projects where project
implementation continued but financing dried up in light of the impending restructuring. These
are included as external debt in the DSA.

• Central bank external debt (including outstanding Fund credit), together with the debt of social
security funds guaranteed by the central government, are also included in the coverage. As of
end-December 2021, this debt consists solely of an outstanding government guaranteed
external loan to the Public Service Pension Fund of $52.7 million. Looking ahead, this will include
the projected IMF disbursements to the central bank.

• The authorities plan to use the SDR allocation (approved by the IMF in August 2021) to finance
the budget over 2022-24; 7 the current intention is to use 50 percent of the allocation in 2022
and 25 percent in each of 2023 and 2024. This is incorporated into the DSA in line with the staff
guidance note and taking account of the fact that the allocation sits on the government balance
sheet. 8

• Local governments in Zambia currently do not have the capacity to borrow without the central
government’s guarantee.

• The authorities confirmed that no extrabudgetary funds currently exist with outstanding debt.

5
The standard contingent liability shock also provides for the contingent risk arising from potential financial sector
support.
6
Sensitivity analysis conducted by staff at the time of Staff Level Agreement in December 2021 showed that the
Mopani mine would be financially viable even if copper prices fell to $7,070 per metric ton and copper output only
reached 86,000 metric tons. It would take ZCCM-IH until 2040 to repay the debt due to Glencore. However, the net
cash flow would remain marginally positive after royalties and capital expenditure.
7
Equivalent to about $1.3 billion.
8
See Guidance Note for Fund Staff on the Treatment and Use of SDR Allocations, August 2021,
https://www.imf.org/en/Publications/Policy-Papers/Issues/2021/08/19/Guidance-Note-for-Fund-Staff-on-the-
Treatment-and-Use-of-SDR-Allocations-464319.

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ZAMBIA

• Going forward, Zambia will continue to benefit from IMF capacity development support to
improve debt management and gradually broaden the debt and fiscal coverage to fully include
SOE debt.

Zambia: Public Debt Coverage and the Magnitude of the Contingent Liability Tailored Stress Test

2. The DSA is conducted on a residency basis. In line with the LIC-DSF Guidance Note, while
recognizing the underlying measurement challenges, nonresident holdings of domestic-currency debt (as
recorded by the authorities) are treated as external debt for the purpose of this DSA. The stock of such
holdings at end-2020 was about 18 billion kwacha or $853 million (14 percent of outstanding domestic-
currency government securities), equivalent to 5¼ percent of GDP. End-December 2021 data indicates this
has grown to 54 billion kwacha or about $3.2 billion (28 percent of outstanding domestic-currency
government securities) by end-2021.

Background

3. Zambia’s debt burden was already assessed as unsustainable in 2019, with the added
pressure of the global COVID-19 crisis eventually triggering a sovereign default in 2020. External
central government and government guaranteed debt had already more than quadrupled relative to GDP
over 2014-19, pushing total PPG debt from 23 percent of GDP at end-2014 to 105 percent by end-2019.
This reflected several years of high public investment financed through nonconcessional external loans
but which failed to deliver a meaningful growth dividend. The onset of the COVID-19 pandemic
exacerbated the already precarious position, and spreads on Zambia’s Eurobonds widened sharply from
1,650 basis points in mid-February 2020 to a peak of 4,250 basis points on April 1, 2020 amidst capital
flight from EM and frontier markets. In mid-2020, the government appointed financial and legal advisors
to help prepare a comprehensive debt restructuring strategy and requested a temporary debt service
standstill from all external creditors. They subsequently signed a Memorandum of Understanding (MOU)
for the G-20 DSSI with Paris Club creditors, and were able to reach agreement on DSSI terms with some
other non-Paris Club official bilateral and commercial creditors. However, spreads started to rise again from
end-September 2020 as discussions with the IMF on emergency financing fell through. By the time the
Eurobond default occurred on November 14, 2020, following the rejection of Zambia’s consent solicitation

4 INTERNATIONAL MONETARY FUND

 ZAMBIA

to defer interest payments for six months, it had already been priced in, with spreads peaking at 3,899
at end-October.

4. In 2021, fiscal overruns and burgeoning budget and debt arrears are expected to result in
public and publicly guaranteed debt climbing to an estimated $33.8 billion (or 133 percent of GDP)
by year-end (Table 1). 9 External PPG debt reached $20 billion (78.6 percent of GDP) at end-2021 (or $16.8
billion or 66 percent of GDP excluding nonresident holdings of domestic-currency debt). The domestically
issued local-currency PPG debt stock (including nonresident holdings) reached $11.6 billion (or 192 billion
kwacha) or 45.5 percent of GDP at end-2021). Domestic budget arrears and ZESCO domestic IPP arrears
represent an additional 21.4 percent of GDP (or 32 percent of domestic-currency debt).

5. The current creditor composition of external debt reflects a noteworthy shift away
from traditional multilateral sources over Text Figure 1. Zambia: External FX-denominated
time (Text Figure 1).10 Multilateral and PPG Debt—Creditor Landscape
other IFIs, now represent only 16 percent of ($ billions)
Zambia’s FX-denominated external debt stock, 18

while bilateral creditors represent 47 percent, 16

14
of which non-Paris Club creditors comprise
12
39 percent. Of the remainder, Eurobonds 10
represent 20 percent, while other commercial 8

creditors account for 9 percent. Government 6

guaranteed debt (mostly to 4

2
Chinese commercial creditors) accounted for
0
9 percent of total FX-denominated external 2008 2010 2012 2014 2016 43252 2019 2021

PPG at end-2021. 11 Multilaterals PC Bilaterals Non-PC Bilaterals

Bondholders Other commercial

Sources: Zambian authorities and IMF staff estimates.

9
For the purposes of this DSA, budget arrears are defined to cover both arrears due on VAT refunds plus
expenditure arrears on payments, including on pension contributions and payments due to suppliers.
10
Other accounts payables to external suppliers (budget and IPP external arrears) as well as non-guaranteed SOE
external debt are not included in Text Figure 1 due to a lack of historical data.
11
The figures in Text Figure 1 for 2021 include as official bilaterals also the commercial central government and
guaranteed SOE external debt backed by guarantee from official export-credit agencies, as most of these loans were
in arrears. Other commercial creditors include as well the guaranteed SOE debt not backed by a guarantee from
official export-credit agencies.

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Table 1. Zambia: Public and Publicly Guaranteed Debt Stock—Creditor Composition and
Contracted Debt Service1
(as of end-2021)
2
Debt stock (end of period)
2021 2022 2023 2022 2023
(Percent (Percent
(In US$) (Percent GDP)
9
(In US$) total debt) GDP)
Total 33,786 100.0 132.7 6,334 3,441 29.9 16.2
External foreign-currency debt 16,763 49.6 65.8 2,308 1,560 10.9 7.4
3
Multilateral creditors 2,655 7.9 10.4 112 126 0.5 0.6
IMF - - -
World Bank 1,405 4.2 5.5
ADB/AfDB/IADB 835 2.5 3.3
Other Multilaterals 416 1.2 1.6
o/w EIB 181 0.5 0.7
o/w IFAD 144 0.4 0.6
4
Bilateral creditors 7,952 23.5 31.2 851 982 4.0 4.6
Paris Club 1,332 3.9 5.2 180 195 0.8 0.9
o/w: Israel 458 1.4 1.8
o/w: UK 172 0.5 0.7
Non-Paris Club 6,620 19.6 26.0 671 787 3.2 3.7
o/w: China 5,935 17.6 23.3
o/w: India 326 1.0 1.3
Eurobonds 3,280 9.7 12.9 987 197 4.7 0.9
Commercial creditors 1,555 4.6 6.1 356 255 1.7 1.2
Fuel arrears 597 1.8 2.3 n/a n/a n/a n/a
Arrears to external contractors 563 1.7 2.2 n/a n/a n/a n/a
ZESCO external IPP arrears 161 0.5 0.6 n/a n/a n/a n/a

Domestic-currency debt 17,024 50.4 66.9 4,027 1,881 19 9

Held by residents, total 8,328 24.7 32.7 3,466 1,250 16.3 5.9
Held by non-residents, total 3,246 9.6 12.8 561 631 2.6 3.0
T-Bills 2,094 6.2 8.2 1,980 - 9.3 -
Bonds 9,481 28.1 37.2 2,046 1,881 9.7 8.9
Loans 0 - -
Domestic budget arrears and ZESCO domestic IPP arrears 5,449 16.1 21.4

Memo items:
5
Collateralized debt 2,428 7.2 9.5
o/w: Related
o/w: Unrelated
Contingent liabilities n/a n/a n/a
o/w: Public guarantees
o/w: Other explicit contingent liabilities6
7
SOE guaranteed external debt 1,580 6.2
7
SOE non-guaranteed external debt (ZESCO) 139 0.5
Total external PPG debt8 20,009 78.6
Nominal GDP 21,203
1/ Based on end-December 2021 data from the authorities and IMF staff estimates. It includes arrears on principal and interest. It does not include any penalty fees or interest on the arrears.
2/ Includes direct debt to central government, SOE guaranteed debt and non-guaranteed debt of ZESCO
3/ "Multilateral creditors” are simply institutions with more than one sovereign as a shareholder and may not necessarily align with creditor classification under other IMF policies (e.g. Lending Into
Arrears).
4/ Includes loans to central government and loans backed by guarantee from an official export-credit agencies.
5/ Based on latest available data, as of end-December 2021, there was $2.4 billion of disbursed external foreign-currency debt with some form of security or escrow arrangement that could be
considered as collateralized debt, including debt with a government guarantee or third-party (exporter) guarantee as security. All this debt is in arrears and, where the security or escrow provides for a
claim on funds in a specific account, the authorities have reported zero balances in those accounts. Debt is collateralized when the creditor has rights over an asset or revenue stream that would allow it,
if the borrower defaults on its payment obligations, to rely on the asset or revenue stream to secure repayment of the debt. Collateralization entails a borrower granting liens over specific existing assets
or future receivables to a lender as security against repayment of the loan. Collateral is “unrelated” when it has no relationship to a project financed by the loan. An example would be borrowing to
finance the budget deficit, collateralized by oil revenue receipts. See the joint IMF-World Bank note for the G20 “Collateralized Transactions: Key Considerations for Public Lenders and Borrowers” for a
discussion of issues raised by collateral.
6/ Based on information received, there are no such contingent liabilities. Includes other-one off guarantees not included in publicly guaranteed debt (e.g. credit lines) and other explicit contingent
liabilities not elsewhere classified (e.g. potential legal claims, payments resulting from PPP arrangements).
7// Reflected in external foreign-currency
p public debt in this
g table. y , y y , , , g
debt and arrears.
9/ The debt-to-GDP ratios are calculated from the value in national currency by converting outstanding debt in US dollars at eop exchange rate, and nominal GDP at average period exchange rate.

Sources: Zambian authorities and IMF staff calculations.

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6. While market sentiment has improved and refinancing risks in the domestic debt market
receded since the elections, liquidity pressures remain elevated. Spreads on Zambia’s Eurobonds
dropped sharply since the August 2021 elections but have started to increase since April 2022, standing
at 3,541 basis points as of July 5, 2022, among the highest in EM and frontier markets. On the domestic
side, tight financing conditions through 2019 to the first half of 2021, led to growing budgetary financing
challenges and expenditure arrears (reaching 12.8 percent of GDP by the start of 2021), and, despite some
support from liquidity injections from the Bank of Zambia,12 forced the government to rely on short-term
domestic debt at increasing interest rates, together with private placements, including to help clear some
expenditure arrears. Since mid-2021, the situation has improved dramatically on account of multiple
factors—higher copper prices, the SDR allocation, and post-election optimism—leading to a large influx
of foreign investors in the local currency market, a marked appreciation of the kwacha against the US dollar
(close to 30 percent since end-March) and a sharp drop in yields (400-800 basis points across the yield
curve) (Text Figure 2).13 Nonetheless, given sustained large gross financing needs over the period ahead
and limited financing options given the need for a debt restructuring, financing risks remain elevated
consistent with the DSF market-financing module (Figure 5).

Text Figure 2. Zambia: Profile of Central Government Domestically Issued

Securities
(end–December 2021)
Composition of Holders Stock Composition
(Percent) (Billions of Kwacha)

100 250
90
80 200
70
60 150
50
40
100
30
20
50
10
0
Bills Bonds 0
Jun-15 Aug-17 Oct-19 Dec-21
Bank of Zambia Commercial banks Non-bank public Foreign
Bills Bonds

Sources: Zambia authorities and IMF staff estimates

12
In 2020, the stock of Treasury bills rose to 33 billion Kwacha at end-December 2020, from 21 billion Kwacha at
end-2019; private placements provided support amounting to 23.6 billion Kwacha; and the Bank of Zambia injected
liquidity through an 18 billion Kwacha (5 percent of GDP) targeted medium-term refinancing facility to provide loans
to SMEs, and a secondary market bond repurchase program. In 2021, the stock of Treasury bills stabilized at 34
billion Kwacha at end-December 2021.
13
The total stock of local currency debt held by foreign investors increased from 18 billion kwacha at end-2020 (or
14 percent of the stock outstanding) to 45 billion (or about 25 percent of the stock outstanding) at end-June 2021,
and further 51 billion (or about 34 percent of the stock outstanding) at end-December 2021. The average maturity of
local currency debt securities held by non-resident investors was about 6.6 years.

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7. Liquidity pressures stem in large part from large external debt payments. In 2020-2021,
contracted FX-denominated external debt service (on PPG debt)14 amounted to about $3.6 billion (from
about $1 billion in 2018), larger than the level of FX reserves ($2.7 billion as of November 26, 2021). Given
the authorities’ resource constraints, this resulted in the accumulation of large external debt arrears, despite
the debt service relief received under the G20-DSSI. On the current contracted terms, a similar amount
of FX-denominated external debt service would fall due over 2022-23.

Macroeconomic and Debt Assumptions

The macroeconomic framework underpinning this DSA—staff’s baseline scenario—is predicated on

the Zambian authorities’ commitment to undertake credible steps to restore medium-term debt
sustainability, including scaling back the public investment program, and assumes a gradual economic
recovery from the pandemic together with a significant, but feasible, fiscal adjustment starting from
2022.

8. The COVID-19 pandemic exacerbated fiscal and external imbalances that had already
deteriorated since the July 2019 DSA. Before the COVID-19 pandemic hit, Zambia’s fiscal and external
positions had weakened further relative to the July 2019 DSA that assessed debt to be unsustainable,
on account of continued high public investment spending, a collapse in growth due to drought, and
a weaker exchange rate. Thus, it was clear even before the pandemic that, absent reform, Zambia’s
macroeconomic imbalances and financing constraints would eventually force a disorderly fiscal adjustment
that would depress economic activity and confidence, potentially prompting large capital outflows and
exchange rate pressures. In 2020, the socio-economic shock imposed by the COVID-19 pandemic
exacerbated Zambia’s imbalances, triggering some of these eventualities. Economic activity contracted
by 2¾ percent, including due to a fall in external demand for mining and tourism. Export volumes
collapsed; however, import compression and
Text Figure 3. Zambia: Copper Prices, May 2020–
a positive terms of trade shock— after dipping
June 2022
to $5000 per metric ton (mt) in April 2020,
(U.S. $ per metric ton)
copper prices rebounded to $8000 per mt
by year-end—resulted in a current account
registering a surplus of 12 percent of GDP.
Nonetheless, the overall fiscal deficit of 17.4
percent of GDP (13.8 percent of GDP on
a cash basis) and an unmet external financing
need of the order of 7¼ percent of GDP
resulted in the accumulation of sizeable
external arrears. In parallel, the exchange rate
depreciated by 50 percent year-on-year,
pushing year-end inflation to 19.2 percent,
and further compounding debt vulnerabilities.
Source: Bloomberg

14
Including ZESCO’s nonguaranteed debt.

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9. While growth returned in 2021, underlying macroeconomic imbalances remained stark,

with expenditure overruns ahead of the August elections financed through mounting expenditure
arrears. The economy grew by 3.6 percent in 2021 on the back of strong agricultural growth and electricity
production, and a rebound in wholesale and retail trade. On the external side, the current account surplus
remained elevated at 7.6 percent of GDP as copper prices remain at record highs (peaking at $10,000 per
mt in May, with a projected average of $9,225 over 2022-26), export volumes recover, and imports remain
relatively compressed. Furthermore, since June, the SDR allocation and post-election optimism have helped
improve market sentiment, attracting significant portfolio inflows, reversing the kwacha’s fall against the
U.S. dollar and easing inflationary pressures. Notwithstanding these positive developments, the overall
fiscal deficit in 2021 reached 14.7 percent of GDP (8.5 percent of GDP on a cash basis) and the stock of
budget arrears reached 15.9 percent of GDP at end-2021.

10. This DSA is based on the macroeconomic trajectory envisaged under the proposed Fund-
supported program that involves a steady economic recovery from the pandemic and significant
fiscal adjustment during 2022-25 (Text Table). The economy is projected to grow by about 3 percent in
2022. In the medium term, growth gradually picks up towards 4½ percent as the economy recovers fully
from the pandemic, private sector activity picks up with the clearance of domestic budget arrears, and
overall macroeconomic management improves. The current account surplus tapers to about 2.7 percent
of GDP as private imports normalize; and inflation gradually converges to 7 percent. Text Table 3 shows
a comparison of key macroeconomic variables under the program relative to the 2019 Article IV
consultation.

11. Growth is expected to average around 4.5 percent over 2022-31 (Box 1). While this does
imply a sustained 1.1 ppt increase relative to the average over the most recent ten years (3.4 percent), 15
it is a substantially lower level than that experienced in other periods. For instance, in the ten years
following Zambia reaching the HIPC Decision Point (December 2000), which spanned the global financial
crisis, it experienced average growth of 7.5 percent. However, given an expected medium-term loss
of market access, including as a possible consequence of tighter global financial conditions going forward,
Zambia is anticipated to face continuing financing constraints that will require it to maintain a relatively
tight fiscal stance and limit the scope for public-sector-led growth.

152020 was the first recession since 1998 and so can be considered an outlier. As an alternative comparison, growth
averaged 4.3 percent over the nine years of 2011-2019, and 4.9 percent over the ten years of 2010-2019.

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Zambia: Macro and Debt Assumptions

2020 2021 2022 2023 2024 2025 2026

(Annual percentage change)
Real GDP growth
2019 Article IV 1.7 1.7 1.6 1.5 1.5 1.5 1.6
Program -2.8 3.6 3.0 3.9 4.1 4.5 4.7
Inflation
2019 Article IV 10.0 8.0 8.0 8.0 8.0 8.0 8.0
Program 15.7 20.5 13.0 9.6 7.7 7.2 7.0
GDP deflator
2019 Article IV 9.7 8.2 8.3 8.0 7.7 7.4 7.2
Program 13.7 23.4 8.4 8.7 7.3 6.8 6.8
(Percent of GDP)
Primary deficit (on commitment basis)
2019 Article IV 1.7 -1.8 -2.4 -2.9 -3.2 -3.6 -3.9
Program 10.1 6.0 -0.7 -2.2 -2.7 -3.2 -3.2
Non-interest current account balance
2019 Article IV -0.1 0.6 1.2 1.9 2.1 2.7 2.8
Program 16.8 11.3 5.2 4.4 6.4 6.8 6.9
Net FDI inflows
2019 Article IV 2.9 3.7 4.4 4.4 4.4 4.4 4.4
Program -1.1 0.0 4.0 4.0 4.9 5.0 5.1
(Percent)
Avg. nominal interest rate on external debt
2019 Article IV 4.9 4.7 4.7 5.1 4.8 5.5 5.7
Program 4.2 3.0 4.3 4.3 4.3 4.4 4.5
(Millions of dollars)
Project loan disbursements (incl. guarantees)
2019 Article IV 2224 1740 1251 1100 1103 1158 1216
Program 1424 522 468 445 363 265 200

Source: IMF staff projections.

12. The fiscal adjustment envisaged under the program is significant but feasible. The program’s
anchor will be the primary balance on a commitment basis.16 To place public debt on a declining path,
the primary balance is targeted to improve from a primary deficit of 6.0 percent of GDP in 2021 to a surplus
of 3.2 percent of GDP by 2025 (a 9¼ percent improvement).

13. Front-loaded expenditure rationalization focused on reducing poorly targeted and wasteful
spending, supported by reforms to strengthen commitment controls and enhance fiscal
governance, will contribute the majority of the consolidation effort. A key element will be a sharp
reduction in spending on fuel subsidies in 2022. In December 2021, the authorities removed explicit
subsidies on petroleum products that overwhelmingly benefited the richest, reinstating the automatic
pricing mechanism, with pump prices of petrol and diesel increasing by an initial 20 and 30 percent,
respectively. The authorities have adjusted fuel prices every month since then, to prevent the re-emergence

16This
will be monitored through a quantitative performance criterion on the primary balance on a cash basis,
together with an indicative target on net arrears accumulation.

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of explicit fuel subsidies. Reforms to the Farmer Input Support Program (FISP) announced in the 2022
budget are intended to reduce spending on these from nearly 3 percent of GDP in 2020-21 to around
1 percent of GDP by 2025—by changing the mode of delivery, while maintaining the number of
beneficiaries and giving farmers more choice on what inputs they can purchase.

14. In parallel, the authorities plan to scale back their public investment program to focus on
the highest priority projects. This will reduce poorly targeted and inefficient spending on public
investment that has yielded little positive spillovers to growth in the past. As a consequence, the authorities
expect new disbursements on contracted but undisbursed project loans of only $1.4 billion during 2022-25
(including $834 million from the World Bank and AfDB) relative to the underlying stock of contracted
but undisbursed external debt, estimated at $3.9 billion at end-December 2021. Indeed, with the exception
of multilateral institutions, almost all creditors have already halted new disbursements on this debt given
the impending debt restructuring.

15. The fiscal consolidation will also be supported by domestic revenue mobilization efforts.
Revenues (adjusted for arrears on VAT refunds) are projected to increase by about 3¼ percent of GDP
by 2025, compared to their 2019 (pre-COVID) level of 19.6 percent of GDP. This will include the expected
elimination of tax expenditures (implicit subsidies) on fuel worth about 1.6 percent of GDP by end-
September 2022, together with other measures to broaden the tax base and strengthen compliance.

16. Although this fiscal adjustment is large, the negative impact on growth is expected to be
minimal given the space created for the authorities to increase investment in human capital (health
and education) and to also expand the social safety net. For instance, spending on social protection
is projected to gradually increase to 1.6 percent of GDP by 2025, around the average for AFR countries,
from 0.7 percent in 2020. This increased social spending will support domestic consumption and enhance
growth prospects. In addition, the authorities’ commitment to halt the accumulation of new budget arrears
(including on VAT refunds), coupled with plans to begin clearing the existing stock of these arrears, should
also improve private sector cash flow. At the same time, the reduced domestic financing requirements
should also improve the private sector’s access to finance and support private sector economic activity.

Box 1. Zambia: Drivers of GDP growth in the DSA baseline

The baseline growth trajectory reflects the government’s planned and ongoing policy reforms
with a focus on stimulating private sector-led growth, underpinned by macroeconomic stability,
stronger fiscal management and supported by debt relief.

Short term (2021-22): 3.3 percent p.a. The rebound from initial COVID-19 shock and post-
election market confidence pushed GDP growth through Q3 2021 to 4.0 percent year-on-year.
Improved global copper prices and commissioning of a new 750MW power plant in Kafue are
increasing industrial output and providing support to short-term growth.

Medium term (through 2025): 3.8 percent p.a. The business sector is projected to get a
boost as their cashflows improve with the clearance of arrears (of 8.4 percent of GDP).

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Box 1. Zambia: Drivers of GDP growth in the DSA baseline (concluded)

The revision of the Zambia Development Agency Act to improve market access and investor
participation, along with other economic reforms, would encourage greater private investment.

A stable and predictable mining policy (including the recent change to make mineral royalty tax
deductible) and high copper prices are projected to attract new FDI, boosting production and
exports. Financial stabilization of the power utility (ZESCO) is expected to further spur industrial
output, while improved productivity resulting from input subsidy reforms revives agriculture.
Reforms supported via the proposed IMF ECF and World Bank-supported programs will help
support macroeconomic stability.

Long term (through 2031): 4.4

percent p.a. Structural, fiscal, and
institutional reforms are projected to
build the foundation for sustained
growth that is driven by a
competitive private sector rather
than debt-financed government
spending. Removal of market
distortions should bring financial
sustainability to the energy sector
(electricity and petroleum) and, the
removal of agricultural export bans
should support a more productive agriculture sector. The reorienting of expenditure away from
inefficient subsidies and toward investments in education, health, and social protection will
help build human capital. Decentralization of public services to the communities is anticipated
to increase the efficiency of spending and aid reforms to increase budget credibility and fight
corruption.

17. Financing assumptions in the scenario are based on the most recent information, and
guided by debt conditionality under the program; this DSA corresponds to a pre-restructuring
scenario. With respect to external financing during 2022-25, apart from disbursements of $1.4 billion on
contracted but undisbursed priority project loans, pipeline loans amounting to about $175 million (from
World Bank, AfDB, IFAD, and EIB) are included. New financing is also assumed starting in 2022 from the IMF
and World Bank, which is conditional on the receipt of credible and specific financing assurances from
official creditors and a credible process toward debt restructuring of private claims, and ultimately a
successful debt restructuring. Taking account of the planned fiscal consolidation and identified financing,
the baseline DSA assumes residual external financing gaps are effectively filled through the accumulation of
further arrears.17

17
Through the simulated issuance of a stylized “arrears bond”.

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18. Access to international capital markets is assumed to be lost through the medium term.
Given the magnitude of debt relief required, and the fact that this will be a post-default rather than
a preemptive restructuring, the probability of regaining meaningful access to international markets
in the medium term would appear low, although this will largely depend on progress under the authorities’
reform program. Access to the domestic market is assumed to remain intact under the baseline scenario,
with net financing from the domestic market critical to fund government operations during the
consolidation period; this is predicated on an assumption that this debt would be excluded from
restructuring. Moreover, the recent improvement in domestic financing conditions is expected to be
preserved given the assumed underlying reform progress. Given global financial conditions are likely
to tighten, as advanced economies move to a less accommodative monetary policy stance,
the participation of nonresident investors is anticipated to decline back to historical trends (absorbing
about 15 percent of new issuance) going forward. 18

19. Downside risks to the outlook are substantial. The DSA realism tools (Figure 3, 4) highlight the
large size of the programmed fiscal adjustment relative to outcomes in other LIC programs, and
the likelihood of a diminished growth contribution from public investment over the forecast period;
however, the risk that the adjustment proves infeasible is mitigated by the specific plans already being
implemented to cut wasteful expenditures, especially on subsidies, and the actual financing constraints
on investment, while the latter concern is mitigated by the low efficiency of public investment in recent
years, and the positive impact of higher, more efficient social spending and reducing the economic drag
of arrears.

20. Uncertainty around the duration of the COVID-19 pandemic, and the outlook for copper
prices, add to the risks. The emergence of new COVID-19 variants could prolong the pandemic and
induce renewed economic disruptions, especially given the continued low rates of vaccination in Zambia.
Copper prices are vulnerable to global economic demand and global copper supply developments,
and could also decline relative to the baseline.19 For reference, were copper prices to turn out 10 percent
lower than projected over the program period (or about $930 lower per metric ton), fiscal revenues could
be up to $1 billion lower and export receipts $3 billion lower in aggregate over program period, or about
1 percent and 3 percent of GDP a year on average. Rainfall variability remains a structural risk to Zambia’s
sustainable growth, affecting key sectors like agriculture and electricity and also likely to aggravate external
vulnerabilities, although the authorities’ reform agenda aims to mitigate these risks over time.
The materialization of these risks could reverse the recent positive sentiment seen in domestic markets,
and intensify already elevated financing pressures.

21. And risks surrounding the debt restructuring process itself are high. The diversity of Zambia’s
creditor base raises coordination challenges and could complicate and delay the process of securing
support for the needed restructuring. The availability and quality of assumed domestic market financing
could also come under pressure if restructuring negotiations are protracted and broader investor sentiment

18
The average contribution of non-residents to net financing through the domestic debt market was 9 percent over
2015-2019 and 11 percent over 2015-2020.
19
The baseline is based on futures market prices, which suggest prices will remain elevated, and are consistent with
the assumptions under underpinning the July 2022 IMF World Economic Outlook.

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deteriorates. Given domestic financial institutions’ exposure to domestically-issued debt, financial stability
risks would be aggravated were the assumed treatment of this debt to come under pressure. And,
in addition to the direct impact on financial stability, that could trigger broader economic risks
by weakening market and business confidence, impacting capital flows, reducing the private sector’s access
to finance, thereby dampening private sector activity and long-term investment.

22. Upside risks also exist. These stem mainly from a faster global and domestic recovery from
the pandemic aided by widespread and efficient distribution of the vaccine, a successful debt operation,
greater confidence effects, including from stronger and broader reform momentum, and higher copper
production and prices.

Debt-Carrying Capacity

23. Zambia’s debt-carrying capacity under the Composite Indicator (CI) rating is assessed as
weak. In the 2019 DSA, Zambia was already assessed as having weak debt-carrying capacity, with the low
20

level of reserves playing a key role in the rating. Given the deterioration in outlook since then, exacerbated
by the COVID-19 pandemic, the latest CI score of 2.59 remains below the cut-off for medium debt-carrying
capacity of 2.69.21 The assessment of weak debt-carrying capacity lowers the debt burden thresholds
for Zambia.

CI score
Components Coefficients (A) 10-year average values CI Score components Contribution of
(B) (A*B) = (C) components
CPIA 0.385 3.163 1.22 47%
Real growth rate (in percent) 2.719 2.987 0.08 3%
Import coverage of reserves (in
percent) 4.052 29.211 1.18 46%
Import coverage of reserves^2 (in
percent) -3.990 8.533 -0.34 -13%
Remittances (in percent) 2.022 1.537 0.03 1%
World economic growth (in percent) 13.520 3.050 0.41 16%

CI Score 2.59 100%

CI rating Weak

Source: IMF staff calculations based on LIC DSF.

External DSA Assessment

24. Under the baseline, all four external debt burden indicators breach their prudent thresholds,
mostly by large margins through the medium term and beyond (Figure 1). The debt service-to-
revenue ratio soars to a peak of 61 percent in 2022 given the redemption of Eurobond I and the relatively
low revenue base, and remains well above the 14 percent threshold until 2034 (averaging about 37½

20
The composite indicator is calculated using data from the April 2022 WEO and the latest available 2020 CPIA.
21
The import coverage of reserves projections, which have an important contribution to the CI score (see text table)
are likely to be overestimated due to data quality and likely some misclassification of items that should be recorded
more accurately as imports rather than elsewhere in the financial account (e.g., the case of multinational companies,
intragroup provision of services). Ongoing technical assistance engaged with the authorities will address this
weakness in the balance of payments statistics over the program period.

14 INTERNATIONAL MONETARY FUND

 ZAMBIA

percent in 2022-31). Similarly, the debt service-to-exports ratio peaks at around 27¾ percent in 2022 and
only falls to the threshold of 10 percent in 2030 and breaches again in 2031 (averaging about 18 percent
over 2022-31). On the stock side, the PV of PPG external debt-to-GDP averages about 62 percent from
2022-31, falling below the prudent threshold of 30 percent only in 2039,22 while the PV of PPG external
debt-to-exports indicator also breaches the 140 percent threshold through 2022-25 (averaging about
134 percent over 2022-31).

25. The thresholds for all four external debt indicators are breached by large margins under
stress tests. The standardized exports shock is the most extreme for all external debt burden indicators
except for the debt service-to-revenue, for which the one-time depreciation shock is most extreme. Under
the standardized exports shock, the PV of PPG external debt-to-exports ratio peaks at 302 percent in 2024
and remains well above the threshold throughout the medium and long term.

Public DSA Assessment

Under the baseline, the prudent threshold of 35 percent for the PV of total PPG debt-to-GDP is
breached throughout the medium and long term (Figure 2). After peaking at 125¼ percent in 2021,
the ratio remains elevated at an average of about 93 percent from 2022-31, before finally falling below the
threshold in 2039. The most extreme shock for this indicator is still the standardized export shock, which
peaks at 129 percent in 2024. Similarly, the combined contingent liabilities shock, which accounts for risks
from SOE debt, PPPs and the financial sector, peaks at 130 percent in 2023 and remains above the
threshold throughout the long-term forecast horizon.

Conclusion and Sustainability Assessment

26. Zambia’s is in debt distress. Even before the COVID-19 pandemic, the fiscal and external
positions had weakened further relative to the July 2019 DSA, reflecting continued high public investment
spending, a collapse in growth due to a drought, and a weaker exchange rate. The impact of the COVID-19
pandemic exacerbated these fiscal and external imbalances, further compounding debt vulnerabilities.
In view of this, the authorities hired financial and legal advisors in mid-2020 to help devise a comprehensive
restructuring strategy, and requested a temporary debt service standstill from all external creditors,
including through a consent solicitation to Eurobond holders. Not all creditors agreed, and amidst severe
liquidity shortages and burgeoning domestic payment arrears, the authorities were unable to avoid
the accumulation of arrears on external debt, culminating in Zambia’s default on Eurobonds on November
14, 2020.

27. Restoring debt sustainability will require a deep restructuring of public debt under the G20
CF, together with significant and sustained fiscal adjustment. This DSA is predicated on the Zambian
authorities’ commitment under their program to undertake credible steps to restore medium-term debt
sustainability, and the baseline macroeconomic framework underpinning this DSA entails significant fiscal
adjustment, including a scaling back of the public investment program, and incorporates projected new

22
Note the measurement of this indicator is complicated by the fact that the authorities are currently working on
rebasing GDP; however, this work is not expected to be concluded until end-2023 at the earliest.

INTERNATIONAL MONETARY FUND 15

ZAMBIA

financing of around $2.6 billion from the IMF and World Bank together over 2022-25 (Text Figure 4).23
Nevertheless, large financing gaps would remain over this period and would need to be filled through
a debt restructuring operation.

28. A debt restructuring operation Text Figure 4. Zambia: Projected Official Sector
should provide sufficient relief to Gross External Financing Flows1/
support a return to an assessment of a (Gross, $ millions)
moderate risk of debt distress over the 1400

medium term. This will require addressing 1200

the large threshold breaches for the 1000

external debt service-to-revenue ratio, 800

and ensuring that the PV of debt-to- 600

exports ratio is brought substantially below 400

its threshold after the program, both as a 200
buffer against shocks, and to mitigate 0
against the elevated PV of external debt- 2022 2023 2024 2025 2026 2027 2028 2029 2030

to-GDP ratio.24 IMF IDA AFDB Other Multilaterals Official Bilaterals

Sources: Zambian authorities, IMF and World Bank staff estimates.

29. To support debt sustainability 1/ For 2022-25, this reflects projected disbursements on current
following debt restructuring, various committed project grants, together with requested IMF financing
reforms are in train. To strengthen the and new World Bank financing. For 2026 onwards, this reflects the
broad official sector financing assumptions embedded in the DSA.
institutional framework, the authorities are
revising the Loans and Guarantees Act to provide for greater oversight on the contracting of debt and to
modernize the debt management framework. This will be supported by ongoing efforts to strengthen
public financial management more broadly. At the operational level, debt sustainability will also be
supported by the debt conditionality under the IMF program, which stipulates a zero ceiling on new
nonconcessional external borrowing during the program period, as well as a ceiling on the PV of new
concessional external borrowing.25

23
Assumed financing from the World Bank in 2022 includes, among others, a Development Policy Operation of $275
million and emergency health sector financing of $150 million.

24
Given the ongoing work on rebasing GDP, and associated GDP-measurement challenges, the PV of debt-to-
exports ratio is treated as the main indicator for assessing the evolution of the debt stock.

25
This conditionality excludes nonresident holdings of local currency debt as well as loans from the IMF, World Bank
and AfDB.

16 INTERNATIONAL MONETARY FUND

 ZAMBIA

Figure 1. Zambia: Indicators of Public and Publicly Guaranteed External Debt Under
Alternatives Scenarios, 2022–32

PV of debt-to GDP ratio PV of debt-to-exports ratio

200 400
180 350
160
300
140
120 250

100 200
80
150
60
100
40
20 50
Most extreme shock: Exports Most extreme shock: Exports
0 0
2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

Debt service-to-exports ratio Debt service-to-revenue ratio

45 90

40 80

35 70

30 60

25 50

20 40

15 30

10 20

5 10
Most extreme shock: Exports Most extreme shock: One-time depreciation
0 0
2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

Baseline Historical scenario Most extreme shock 1/ Threshold

Customization of Default Settings Borrowing assumptions on additional financing needs resulting from the stress tests*

Size Interactions Default User defined

Shares of marginal debt

No No External PPG MLT debt 100%
Tailored Stress Terms of marginal debt
Combined CL Yes Avg. nominal interest rate on new borrowing in USD 4.6% 6.6%
Natural disaster n.a. n.a. USD Discount rate 5.0% 5.0%
Commodity price 2/ No No Avg. maturity (incl. grace period) 32 32
Market financing No No Avg. grace period 14 14

Note: "Yes" indicates any change to the size or interactions of * Note: All the additional financing needs generated by the shocks under the stress tests are
the default settings for the stress tests. "n.a." indicates that the assumed to be covered by PPG external MLT debt in the external DSA. Default terms of marginal
stress test does not apply. debt are based on baseline 10-year projections.

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in or before 2032. The stress test with a one-off breach is also presented (if any), while the one-off
breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach,
only that stress test (with a one-off breach) would be presented.

2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.

INTERNATIONAL MONETARY FUND 17

ZAMBIA

Figure 2. Zambia: Indicators of Public Debt Under Alternative Scenarios, 2022–32

PV of Debt-to-GDP Ratio
140

120

100

80

60

40

20 Most extreme shock: Combined contingent liabilities

0
2022 2024 2026 2028 2030 2032

PV of Debt-to-Revenue Ratio Debt Service-to-Revenue Ratio

700 160

600 140

120
500
100
400
80
300
60
200
40

100 Most extreme shock: Commodity price Most extreme shock: Combined contingent liabilities
20

0 0
2022 2024 2026 2028 2030 2032 2022 2024 2026 2028 2030 2032

Baseline Most extreme shock 1/

TOTAL public debt benchmark Historical scenario

Borrowing assumptions on additional financing needs resulting from the stress Default User defined
tests*
Shares of marginal debt
External PPG medium and long-term 46% 46%
Domestic medium and long-term 24% 24%
Domestic short-term 30% 30%
Terms of marginal debt
External MLT debt
Avg. nominal interest rate on new borrowing in USD 4.6% 6.6%
Avg. maturity (incl. grace period) 32 32
Avg. grace period 14 14
Domestic MLT debt
Avg. real interest rate on new borrowing 5.8% 5.8%
Avg. maturity (incl. grace period) 6 6
Avg. grace period 5 5
Domestic short-term debt
Avg. real interest rate 1.8% 1.8%
* Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under
the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections.

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in or before 2032. The stress test with a one-off breach is
also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off
breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off
breach) would be presented.

18 INTERNATIONAL MONETARY FUND

 ZAMBIA
Figure 3. Zambia: Drivers of Debt Dynamics – Baseline Scenario

Gross Nominal PPG External Debt Debt-creating flows Unexpected Changes in Debt 1/
(in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP)
150
120
Current DSA proj. Residual 60
Previous DSA
DSA-2015 100 Interquartile
100 50
range (25-75)
Price and
exchange rate50
40
80
Real GDP
growth 0 30
Change in PPG
60 debt 3/

Nominal -50 20
40 interest rate

Median
-100 10
20 Current
account + FDI

-150 0
0
Change in 5-year 5-year
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
PPG debt 3/ Contribution of Distribution across LICs 2/
historical projected -10 unexpected
change change

Public debt
Gross Nominal Public Debt Debt-creating flows Unexpected Changes in Debt 1/
(in percent of GDP; DSA vintages) (percent of GDP) (past 5 years, percent of GDP)
Residual 150
Current DSA
Previous DSA proj. 120
DSA-2015 Interquartile
180 Other debt 100 range (25-75)
creating flows 100
160
140 Real Exchange
rate 50 80
120 depreciation

100
Real GDP 60 Change in debt
growth 0
INTERNATIONAL MONETARY FUND

80
Real interest 40
60 rate
-50
40 20
Primary deficit
20
-100 Median
0 0
Change in debt 5-year 5-year
Distribution across LICs 2/
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032

historical projected Contribution of

-20 unexpected
change change

1/ Difference between anticipated and actual contributions on debt ratios.

2/ Distribution across LICs for which LIC DSAs were produced.
3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt
dynamics equation.

ZAMBIA
19
ZAMBIA

Figure 4. Zambia: Realism tools

3-Year Adjustment in Primary Balance Fiscal Adjustment and Possible Growth Paths 1/
(Percentage points of GDP)

5 2
14 Distribution 1/
4

12
Projected 3-yr adjustment
3
3-year PB adjustment greater

In percentage points of GDP

than 2.5 percentage points of 2
10
GDP in approx. top quartile

In percent
1
8 1
0

6 -1

4 -2

-3
2
-4 0

0
2016 2017 2018 2019 2020 2021 2022 2023
Baseline Multiplier = 0.2 Multiplier = 0.4
more
-4.5
-4.0
-3.5
-3.0
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
Multiplier = 0.6 Multiplier = 0.8

1/ Data cover Fund-supported programs for LICs (excluding emergency financing) approved since 1990. The 1/ Bars refer to annual projected fiscal adjustment (right-hand side scale) and lines show possible real
size of 3-year adjustment from program inception is found on the horizontal axis; the percent of sample is GDP growth paths under different fiscal multipliers (left-hand side scale).
found on the vertical axis.

Public and Private Investment Rates Contribution to Real GDP growth

(percent of GDP) (percent, 5-year average)

36 5
34
32 4
30
28 4
26
24 3
22
20 3
18
16 2
14
12 2
10
8 1
6
4 1
2
0 0
Historical Projected (Prev. DSA) Projected (Curr. DSA)
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

Gov. Invest. - Prev. DSA Gov. Invest. - Curr. DSA Contribution of other factors

Priv. Invest. - Prev. DSA Priv. Invest. - Curr. DSA Contribution of government capital

20 INTERNATIONAL MONETARY FUND

 ZAMBIA

Figure 5. Zambia: Market-Financing Risk Indicators

GFN 1/ EMBI 2/
Benchmarks 14 570
Values 27 2100
Breach of benchmark Yes Yes

Potential heightened
liquidity needs High

1/ Maximum gross financing needs (GFN) over 3-year baseline projection horizon.
2/ EMBI spreads correspond to the latest available data.

90 PV of debt-to GDP ratio PV of debt-to-exports ratio

180
80 160
70
140
60
120
50
100
40
80
30
60
20
40
10
20
0
0
2022 2024 2026 2028 2030 2032
2022 2024 2026 2028 2030 2032

Debt service-to-exports ratio Debt service-to-revenue ratio

30 70

25 60

50
20
40
15
30
10
20

5 10

0 0
2022 2024 2026 2028 2030 2032 2022 2024 2026 2028 2030 2032

Baseline Market financing Threshold

Sources: Country authorities; and staff estimates and projections.

INTERNATIONAL MONETARY FUND 21

22

ZAMBIA
ZAMBIA
Table 2. Zambia: External Debt Sustainability Framework, Baseline Scenario, 2019–37
INTERNATIONAL MONETARY FUND

(In Percent of GDP, unless otherwise indicated)

Actual Projections Average 8/

2019 2020 2021 2022 2023 2024 2025 2026 2027 2032 2037 Historical Projections

External debt (nominal) 1/ 105.1 150.2 116.9 110.3 104.6 99.3 93.7 85.1 78.8 55.5 46.9 71.6 82.1 Definition of external/domestic debt Residency-based
of which: public and publicly guaranteed (PPG) 66.8 103.0 78.6 81.97 79.6 77.9 75.8 70.4 67.2 50.7 37.4 42.5 67.3
Is there a material difference between the
Yes
two criteria?
Change in external debt 27.0 45.1 -33.3 -6.5 -5.7 -5.3 -5.6 -8.6 -6.2 -5.4 0.3
Identified net debt-creating flows 8.8 18.1 -29.9 -8.1 -8.4 -11.4 -11.9 -11.9 -14.2 -13.3 -12.7 -5.2 -12.2
Non-interest current account deficit -3.5 -16.8 -11.3 -5.5 -4.4 -6.6 -6.8 -6.7 -8.9 -7.9 -7.4 -3.4 -7.3
Deficit in balance of goods and services -1.8 -15.0 -18.7 -7.4 -5.6 -6.2 -6.1 -6.4 -7.8 -7.7 -7.6 -5.1 -7.1
Exports 35.4 47.3 54.8 46.4 45.5 45.2 45.0 45.5 47.3 47.3 43.8
Debt Accumulation
Imports 33.6 32.2 36.1 39.0 39.9 39.1 38.9 39.2 39.5 39.6 36.1
5.0 25
Net current transfers (negative = inflow) -1.4 -1.2 -1.5 -1.4 -1.4 -1.4 -1.4 -1.4 -1.4 -1.4 -1.3 -1.3 -1.4
of which: official 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.5
Other current account flows (negative = net inflow) -0.3 -0.5 8.9 3.3 2.6 1.0 0.7 1.1 0.3 1.3 1.5 3.0 1.2
4.0 20
Net FDI (negative = inflow) 0.6 1.1 0.0 -4.0 -4.0 -4.9 -5.0 -5.1 -5.1 -5.2 -4.9 -3.9 -4.9
Endogenous debt dynamics 2/ 11.7 33.8 -18.7 1.4 0.0 0.0 0.0 -0.1 -0.2 -0.2 -0.4 3.5
Contribution from nominal interest rate 2.1 4.7 3.6 4.1 4.1 4.1 4.2 3.9 3.7 2.5 1.7 3.0 15
Contribution from real GDP growth -1.3 3.8 -4.6 -2.7 -4.1 -4.0 -4.2 -4.1 -3.9 -2.7 -2.1
2.5
Contribution from price and exchange rate changes 10.9 25.3 -17.7 … … … … … … … …
Residual 3/ 18.1 27.0 -3.4 1.6 2.7 6.1 6.3 3.2 7.9 7.9 13.0 15.5 6.6 2.0 10
of which: exceptional financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.5

1.0 5
Sustainability indicators
PV of PPG external debt-to-GDP ratio ... ... 85.5 70.9 71.0 69.9 68.1 63.6 61.0 45.7 32.8 0.5
PV of PPG external debt-to-exports ratio ... ... 156.1 152.8 156.0 154.5 151.2 139.6 128.9 96.7 74.9
0.0 0
PPG debt service-to-exports ratio 18.8 26.6 11.0 27.6 23.1 27.6 21.9 22.1 14.6 8.1 4.9 2022 2024 2026 2028 2030 2032
PPG debt service-to-revenue ratio 33.1 63.5 26.5 61.1 47.9 56.0 43.9 44.7 30.5 16.7 9.3
Gross external financing need (Million of U.S. dollars) 1091.3 127.0 -188.1 2004.7 1735.8 1530.0 687.2 816.9 -1174.3 -3090.5 -9554.0 Debt Accumulation
Grant-equivalent financing (% of GDP)
Key macroeconomic assumptions
Grant element of new borrowing (% right scale)
Real GDP growth (in percent) 1.4 -2.8 3.6 3.0 3.9 4.1 4.5 4.7 4.9 4.8 4.9 3.4 4.6
GDP deflator in US dollar terms (change in percent) -12.7 -20.1 13.0 23.1 0.8 2.8 2.6 2.8 2.6 2.5 2.7 -3.3 4.3
Effective interest rate (percent) 4/ 2.3 3.5 2.8 4.5 3.9 4.2 4.5 4.5 4.6 4.5 3.9 2.2 4.5 External debt (nominal) 1/
Growth of exports of G&S (US dollar terms, in percent) -17.3 3.6 35.7 7.4 2.7 6.3 6.7 8.8 11.9 7.4 0.0 3.6 7.5 of which: Private
Growth of imports of G&S (US dollar terms, in percent) -10.2 -25.6 31.3 36.8 7.1 4.9 6.7 8.3 8.6 7.3 0.0 5.2 10.1 120
Grant element of new public sector borrowing (in percent) ... ... ... 11.5 12.9 9.1 9.3 3.8 6.3 22.9 35.0 ... 12.2
Government revenues (excluding grants, in percent of GDP) 20.1 19.8 22.7 21.0 21.9 22.3 22.5 22.5 22.7 23.1 23.1 18.7 22.5 100
Aid flows (in Million of US dollars) 5/ 320.3 394.2 262.5 440.8 371.7 342.1 266.9 239.2 290.1 604.7 629.0
Grant-equivalent financing (in percent of GDP) 6/ ... ... ... 2.0 1.8 1.5 1.2 0.6 0.7 0.9 0.6 ... 1.1
80
Grant-equivalent financing (in percent of external financing) 6/ ... ... ... 13.6 15.5 11.3 12.0 7.6 10.6 29.4 45.3 ... 16.3
Nominal GDP (Million of US dollars) 23,309 18,111 21,203 26,885 28,153 30,124 32,304 34,739 37,382 54,137 78,173
Nominal dollar GDP growth -11.4 -22.3 17.1 26.8 4.7 7.0 7.2 7.5 7.6 7.5 7.7 0.1 9.0 60

Memorandum items: 40
PV of external debt 7/ ... ... 123.8 99.3 96.0 91.3 86.0 78.3 72.6 50.5 42.3
In percent of exports ... ... 225.9 213.9 211.1 201.9 191.1 171.9 153.4 106.7 96.7 20
Total external debt service-to-exports ratio 21.2 34.6 18.9 36.6 31.9 36.6 31.1 30.9 22.9 15.5 0.2
PV of PPG external debt (in Million of US dollars) 18130.5 19061.8 19984.1 21053.7 21985.6 22088.5 22803.4 24748.4 25612.0 0
(PVt-PVt-1)/GDPt-1 (in percent) 4.4 3.4 3.8 3.1 0.3 2.1 0.6 0.3 2022 2024 2026 2028 2030 2032
Non-interest current account deficit that stabilizes debt ratio -30.4 -61.9 22.1 1.0 1.3 -1.3 -1.2 2.0 -2.7 -2.5 -7.7

Sources: Country authorities; and staff estimates and projections.

1/ Includes both public and private sector external debt.
2/ Derived as [r - g - ρ(1+g) + Ɛα (1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, Ɛ=nominal appreciation of the local currency, and α= share
of local currency-denominated external debt in total external debt.
3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.
4/ Current-year interest payments divided by previous period debt stock.
5/ Defined as grants, concessional loans, and debt relief.
6/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).
7/ Assumes that PV of private sector debt is equivalent to its face value.
8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
 Table 3. Zambia: Public Sector Debt Sustainability Framework, Baseline Scenario, 2019–37
(In Percent of GDP, unless otherwise indicated)

Actual Projections Average 6/

2019 2020 2021 2022 2023 2024 2025 2026 2027 2032 2037 Historical Projections

Public sector debt 1/ 111.6 154.9 132.7 129.3 120.8 112.7 107.1 100.7 94.9 66.8 45.5 64.3 95.7
Definition of external/domestic Residency-
of which: external debt 66.8 103.0 78.6 82.0 79.6 77.9 75.8 70.4 67.2 50.7 37.4 42.5 67.3
debt based
of which: local-currency denominated
Change in public sector debt 51.6 43.3 -22.2 -3.4 -8.5 -8.1 -5.6 -6.4 -5.8 -4.9 -3.8
Is there a material difference
Identified debt-creating flows 11.9 37.0 -39.4 2.6 -2.8 -2.0 -2.7 -3.4 -4.5 -4.4 -3.8 1.7 -3.2 Yes
between the two criteria?
Primary deficit (cash basis) 3.6 7.8 2.1 1.8 0.0 -0.7 -1.4 -1.6 -2.8 -2.6 -2.1 1.7 -1.6
Revenue and grants 20.4 20.3 23.3 21.4 22.3 22.7 22.8 22.8 23.0 23.3 23.3 19.3 22.8
of which: grants 0.3 0.5 0.6 0.4 0.3 0.3 0.3 0.3 0.3 0.2 0.2 Public sector debt 1/
Primary (noninterest) expenditure 22.9 28.1 25.4 23.2 22.3 22.0 21.4 21.2 20.2 20.7 21.2 20.9 21.2
Automatic debt dynamics 8.3 29.2 -41.5 0.8 -2.8 -1.3 -1.3 -1.7 -1.7 -1.8 -1.6 of which: local-currency denominated
Contribution from interest rate/growth differential 3.5 6.0 -8.4 -2.2 -1.4 -0.7 -0.8 -1.2 -1.4 -1.6 -1.4
of which: foreign-currency denominated
of which: contribution from average real interest rate 4.4 2.8 -3.0 1.6 3.5 4.1 4.1 3.5 3.3 1.7 0.9
of which: contribution from real GDP growth -0.9 3.2 -5.3 -3.8 -4.8 -4.8 -4.9 -4.8 -4.7 -3.3 -2.3 140
Contribution from real exchange rate depreciation 4.8 23.2 -33.2 ... ... ... ... ... ... ... ... 120
Other identified debt-creating flows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
100
Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Recognition of contingent liabilities (e.g., bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 80
Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 60
Other debt creating or reducing flow (please specify) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
40
Residual 39.7 6.3 17.2 -3.0 -7.1 -6.8 -3.5 -3.5 -1.6 -0.7 -0.3 10.2 -2.9
20
Sustainability indicators 0
PV of public debt-to-GDP ratio 2/ ... ... 125.3 122.1 113.8 106.1 100.7 95.1 89.9 62.7 41.6 2022 2024 2026 2028 2030 2032
PV of public debt-to-revenue and grants ratio … … 537.7 571.4 510.8 468.5 441.5 417.3 390.9 268.9 178.4
Debt service-to-revenue and grants ratio 3/ 87.1 124.3 94.1 120.4 98.6 104.7 88.9 91.1 80.5 43.8 23.2
Gross financing need 4/ 20.3 33.1 24.1 27.1 21.5 22.6 18.5 18.7 15.4 7.6 3.2 of which: held by residents

of which: held by non-residents

Key macroeconomic and fiscal assumptions
140
Real GDP growth (in percent) 1.4 -2.8 3.6 3.0 3.9 4.1 4.5 4.7 4.9 4.8 4.9 3.4 4.6
120
Average nominal interest rate on external debt (in percent) 6.8 4.7 3.7 4.5 4.6 4.5 4.6 4.5 4.5 4.2 3.9 3.8 4.4
Average real interest rate on domestic debt (in percent) 11.2 1.9 -7.8 -0.2 3.4 6.0 7.0 6.4 6.3 4.3 2.8 4.6 4.8 100
Real exchange rate depreciation (in percent, + indicates depreciation) 11.2 34.4 -34.7 … ... ... ... ... ... ... ... 6.7 ... 80
Inflation rate (GDP deflator, in percent) 7.6 13.7 23.4 8.4 8.7 7.3 6.8 6.8 6.6 6.6 6.7 10.5 7.1 60
Growth of real primary spending (deflated by GDP deflator, in percent) 23.8 19.4 -6.3 -6.3 0.1 2.6 1.9 3.4 0.2 3.7 5.2 10.2 2.7 40
Primary deficit that stabilizes the debt-to-GDP ratio 5/ -48.0 -35.5 24.3 5.2 8.5 7.5 4.3 4.8 3.0 2.3 1.7 -19.7 4.4
20
PV of contingent liabilities (not included in public sector debt) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
0
2022 2024 2026 2028 2030 2032
Sources: Country authorities; and staff estimates and projections.
1/ Coverage of debt: The central government plus social security, central bank, government-guaranteed debt, non-guaranteed SOE debt . Definition of external debt is Residency-based.
2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections.
INTERNATIONAL MONETARY FUND

3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt.
4/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period and other debt creating/reducing flows.
5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question.
6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.

ZAMBIA
23
ZAMBIA

Table 4. Zambia: Sensitivity Analysis for Key Indicators and Publicly Guaranteed External
Debt, 2022–32 (In Percent)

Projections 1/
2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

PV of debt-to GDP ratio

Baseline 71 71 70 68 64 61 58 56 53 49 46

A. Alternative Scenarios
A1. Key variables at their historical averages in 2022-2032 2/ 71 76 84 93 100 112 124 136 148 161 176
A2. Alternative Scenario : Contingent Liabilities + FX debt 71 89 91 90 86 84 82 81 78 74 72

B. Bound Tests
B1. Real GDP growth 71 75 78 76 71 68 65 62 59 54 51
B2. Primary balance 71 73 78 78 74 71 69 67 64 60 58
B3. Exports 71 84 102 100 94 91 88 85 81 76 73
B4. Other flows 3/ 71 76 80 78 74 71 68 66 62 58 55
B5. Depreciation 71 86 85 82 77 74 70 67 63 58 55
B6. Combination of B1-B5 71 81 86 85 80 78 75 73 70 65 62

C. Tailored Tests
C1. Combined contingent liabilities 71 80 81 81 77 74 72 71 69 65 62
C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
C3. Commodity price 71 79 85 85 81 79 77 75 72 68 65
C4. Market Financing 71 79 78 77 73 70 68 64 60 54 51

Threshold 30 30 30 30 30 30 30 30 30 30 30

PV of debt-to-exports ratio
Baseline 153 156 155 151 140 129 123.1 118 112 103 97

A. Alternative Scenarios
A1. Key variables at their historical averages in 2022-2032 2/ 153 166 186 207 221 238 262 287 313 340 372
A2. Alternative Scenario : Contingent Liabilities + FX debt 153 196 202 201 190 178 172 170 165 157 151

B. Bound Tests
B1. Real GDP growth 153 156 155 151 140 129 123 118 112 103 97
B2. Primary balance 153 161 174 172 162 150 145 141 136 127 122
B3. Exports 153 212 302 297 278 259 249 241 231 216 207
B4. Other flows 3/ 153 166 177 174 162 150 144 139 132 123 117
B5. Depreciation 153 150 148 145 134 123 118 112 106 97 91
B6. Combination of B1-B5 153 185 175 208 195 182 175 170 163 152 145

C. Tailored Tests
C1. Combined contingent liabilities 153 175 180 179 168 157 152 149 145 137 131
C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
C3. Commodity price 153 198 211 206 191 175 167 162 156 146 141
C4. Market Financing 153 156 155 153 143 133 128 122 114 103 96

Threshold 140 140 140 140 140 140 140 140 140 140 140

Debt service-to-exports ratio

Baseline 28 23 28 22 22 15 12 11 10 12 8

A. Alternative Scenarios
A1. Key variables at their historical averages in 2022-2032 2/ 28 24 31 27 30 23 21 22 24 31 26
A2. Alternative Scenario : Contingent Liabilities + FX debt 28 23 30 24 25 17 14 13 13 15 11

B. Bound Tests
B1. Real GDP growth 28 23 28 22 22 15 12 11 10 12 8
B2. Primary balance 28 23 28 23 23 16 13 12 12 14 10
B3. Exports 28 28 42 37 37 26 21 20 19 22 16
B4. Other flows 3/ 28 23 28 23 23 16 13 12 11 14 9
B5. Depreciation 28 23 27 22 22 14 11 10 10 12 8
B6. Combination of B1-B5 28 25 35 29 29 20 16 15 15 18 12

C. Tailored Tests
C1. Combined contingent liabilities 28 23 29 24 24 16 13 12 12 14 10
C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
C3. Commodity price 28 27 33 27 27 18 15 13 13 16 11
C4. Market Financing 28 23 28 23 24 21 25 24 16 13 9

Threshold 10 10 10 10 10 10 10 10 10 10 10

Debt service-to-revenue ratio

Baseline 61 48 56 44 45 30 24 22 21 25 17

A. Alternative Scenarios
A1. Key variables at their historical averages in 2022-2032 2/ 61 50 63 55 61 48 44 46 50 64 54
A2. Alternative Scenario : Contingent Liabilities + FX debt 61 48 60 49 50 36 29 27 27 31 22

B. Bound Tests 61 48 60 49 50 36 29 27 27 31 22
B1. Real GDP growth 61 50 62 49 50 34 27 24 23 28 19
B2. Primary balance 61 48 57 46 47 33 27 25 24 28 20
B3. Exports 61 51 64 55 56 40 33 31 29 34 25
B4. Other flows 3/ 61 48 57 47 48 33 27 25 24 28 19
B5. Depreciation 61 60 70 54 56 38 29 27 26 31 20
B6. Combination of B1-B5 61 50 64 53 54 38 31 29 28 32 23

C. Tailored Tests
C1. Combined contingent liabilities 61 48 58 47 48 34 28 26 25 30 21
C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
C3. Commodity price 61 55 67 55 56 38 30 27 27 31 22
C4. Market Financing 61 48 57 47 48 45 53 51 34 27 18

Threshold 14 14 14 14 14 14 14 14 14 14 14

Sources: Country authorities; and staff estimates and projections.

1/ A bold value indicates a breach of the threshold.
2/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.
3/ Includes official and private transfers and FDI.

24 INTERNATIONAL MONETARY FUND

 ZAMBIA

Table 5. Zambia: Sensitivity Analysis for Key Indicators of Public Debt, 2022–32
(In Percent)
Projections 1/
2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032

PV of Debt-to-GDP Ratio

Baseline 122 114 106 101 95 90 84 79 73 68 63

A. Alternative Scenarios
A1. Key variables at their historical averages in 2022-2032 2/ 122 112 104 99 94 92 90 87 85 83 81
0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A

B. Bound Tests
B1. Real GDP growth 122 119 118 113 109 106 103 100 96 93 91
B2. Primary balance 122 116 116 110 104 99 94 88 83 78 74
B3. Exports 122 122 129 124 118 112 106 100 95 89 84
B4. Other flows 3/ 122 119 117 111 105 100 94 88 83 77 72
B5. Depreciation 122 127 117 109 103 97 91 86 80 74 69
B6. Combination of B1-B5 122 113 110 104 99 94 89 84 79 74 70

C. Tailored Tests
C1. Combined contingent liabilities 122 130 121 115 110 105 99 94 89 84 79
C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
C3. Commodity price 122 118 115 115 114 112 110 107 103 100 98
C4. Market Financing 122 114 106 101 97 92 87 80 74 68 62

TOTAL public debt benchmark 35 35 35 35 35 35 35 35 35 35 35

PV of Debt-to-Revenue Ratio

Baseline 571 511 468 441 417 391 367 341 314 289 269

A. Alternative Scenarios
A1. Key variables at their historical averages in 2022-2032 2/ 571 504 457 432 414 401 391 379 366 353 348
0 120 84 91 78 82 76 66 61 56 61 56

B. Bound Tests
B1. Real GDP growth 571 532 518 496 480 462 448 431 414 398 389
B2. Primary balance 571 522 510 480 456 430 407 383 357 333 316
B3. Exports 571 548 571 542 517 488 463 435 407 380 359
B4. Other flows 3/ 571 532 515 487 463 435 411 384 356 330 310
B5. Depreciation 571 571 515 480 452 424 398 372 344 318 298
B6. Combination of B1-B5 571 505 485 456 433 409 387 364 340 317 300

C. Tailored Tests
C1. Combined contingent liabilities 571 585 535 505 481 455 432 407 382 357 340
C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
C3. Commodity price 571 592 565 560 540 515 491 462 444 428 420
C4. Market Financing 571 511 470 445 424 400 377 349 319 290 267

Debt Service-to-Revenue Ratio

Baseline 120 99 105 89 91 80 63 57 48 50 44

A. Alternative Scenarios
A1. Key variables at their historical averages in 2022-2032 2/ 120 98 104 86 87 76 61 56 49 51 44
0 120 84 91 78 82 76 66 61 56 61 56

B. Bound Tests
B1. Real GDP growth 120 104 118 104 108 98 80 75 68 72 66
B2. Primary balance 120 99 113 103 100 88 71 67 60 61 53
B3. Exports 120 99 107 95 97 86 69 63 54 56 49
B4. Other flows 3/ 120 99 106 92 94 83 66 59 51 53 46
B5. Depreciation 120 99 117 102 105 92 73 66 59 63 55
B6. Combination of B1-B5 120 97 106 94 96 85 69 62 54 56 50

C. Tailored Tests
C1. Combined contingent liabilities 120 99 134 104 102 91 74 77 64 63 56
C2. Natural disaster n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
C3. Commodity price 120 113 122 107 116 105 86 77 68 74 70
C4. Market Financing 120 99 106 91 95 95 92 85 61 51 45

Sources: Country authorities; and staff estimates and projections.

1/ A bold value indicates a breach of the benchmark.
2/ Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.
3/ Includes official and private transfers and FDI.

INTERNATIONAL MONETARY FUND 25

 Statement by the Staff Representative on Zambia
Executive Board Meeting

August 31, 2022

This statement provides information that has become available since the issuance of
the Staff Report for the Request for an Arrangement under the Extended Credit
Facility (EBS/22/73). The information does not alter the thrust of the staff appraisal.

1. Prior actions and other policy reforms. On August 29, the authorities
published their response to the electricity cost-of-service study, alongside the study
itself, fulfilling the remaining prior action for the program. The new Bank of Zambia
Act has received Presidential assent and was published on August 24. The new Act
strengthens the Bank of Zambia’s mandate, autonomy, and governance, in line with
Fund advice.

2. Growth. The growth outlook appears marginally better. The outturn for 2021
exceeded staff’s estimate by a full percentage point (4.6 versus 3.6 percent), largely
explained by a much stronger outturn for the agricultural sector (6.9 versus -
0.7 percent). In addition, announced mining expansion plans appear to be moving
faster than anticipated. The better outlook for mining production, with more granular
information on the prospects for cobalt and nickel production, will help mitigate the
impact on exports and revenues of the recent drop in copper prices.

3. Exchange rate and price developments. The exchange rate has appreciated
by a further seven percent since the end of June and is now 40 percent stronger than
end-June 2021. On July 31, the Energy Regulation Board reduced fuel prices by
11-13 percent, reflecting recent movements in international crude oil prices and the
exchange rate. Overall inflation has remained broadly stable, with the annual inflation
rate marginally ticking up from 9.7 percent in June to 9.8 percent in August (with
annual inflation of 9.9 percent in July).

4. Fiscal developments. The budget outturns through July are broadly in line
with the proposed program targets, with fiscal revenues exceeding and primary
expenditure falling just short of programmed levels.
 Statement by Ms. Mannathoko, Executive Director for Zambia
and Mr. Mengistu, Advisor to the Executive Director

Having inherited sizable debt and macroeconomic imbalances, the current Government, elected a year
ago, is burdened with significant legacy issues amidst ongoing shocks including the Covid-19 pandemic,
drought and spillovers from the Russia war in Ukraine. Immediately upon assuming office, the
government engaged with the IMF and G20 creditors, on the process to restructure debt under the G20
common framework and plans to restore macroeconomic stability and debt sustainability and deliver
sustainable and inclusive economic growth. The authorities have embarked on an ambitious economic
transformation agenda which seeks to grow Zambia into a prosperous middle-income country, guided
by the Eighth National Development Plan (2022-2026), which includes structural, legal and governance
reforms aimed at addressing impediments to higher and more sustainable growth. The authorities are
committed to securing and entrenching macroeconomic stability with bold measures taken over the past
year generating a positive response from markets, evidenced by a significant drop in bond yields.
Nevertheless, imbalances remain sizable, and risks persist. Against this backdrop, they seek a 38-month
Extended Credit Facility (ECF) arrangement to help stabilize the economy and place it on a path towards
sustainable, inclusive growth.

Introduction
1. Our Zambian authorities appreciate the candid discussions with Fund staff during the ECF program
negotiations. They consider the proposed program to be firmly aligned with their own reform plans
and the eighth national development plan (NDP8) and are in broad agreement with staff’s assessment
and policy recommendations.
2. While growth resumed in 2021 and 2022, following a pandemic-induced recession in 2020,
macroeconomic pressures from successive shocks remain, generating large fiscal and balance of
payments needs. Lower copper prices in 2015-16 and 2020, drought in 2019, the pandemic, and recent
global food and fuel price inflation shocks, have had a cumulative impact which has in turn
exacerbated poverty and inequality.
3. Over the past year, the authorities have undertaken a range of measures aimed, among other things, at
providing a credible plan for fiscal adjustment (they published an updated medium-term expenditure
framework, ensuring it is aligned with ECF program objectives). Other actions were geared at
strengthening transparency, governance, and efficiency of public spending; at enhancing debt
transparency, at strengthening central bank independence, at containing fiscal risks related to
inefficient subsidies and the electricity SOE, and at enhancing fiscal controls (they published new IMF
and World Bank vetted public procurement regulations and a strategy for clearing expenditure and
VAT refund arrears). Further reform measures under the ECF program, will build on this progress.
4. The authorities seek Executive Directors’ support for a 38-month ECF arrangement to anchor reforms
under NDP8 and place debt on a sustainable footing. The authorities hope that the backing provided
by the ECF will catalyze additional donor support, while the accompanying debt restructuring under
the Common Framework will entrench debt sustainability. The ECF will complement the authorities’
reform agenda while addressing protracted balance of payment challenges alongside provision of
valuable technical assistance.
 2

Recent Economic Developments and Outlook

5. Real GDP recovered in 2021, with 3.6 percent growth recorded after a 2.8 percent contraction in 2020.
While the GDP outturn in 2021 reflected a relatively broad-based recovery led by construction and
ICT, other key sectors still lagged. The agricultural sector stagnated due to climate -induced impacts
and is expected to contract in 2022; and notwithstanding higher copper prices, the mining sector
contracted significantly in 2021, reflecting supply-chain disruptions and operational challenges at
some mines, and a drop in ore-grades. In the medium-term, growth is expected to average about 4.2
percent, up from a projected 3.0 percent in 2022, supported by effective implementation of the reform
agenda. In the meantime, the vaccination campaign which aims to protect lives and sustain economic
activity, is ongoing, with 41 percent of adults over 18 vaccinated by June 2022. The authorities are
working to increase the vaccine rollout and improve vaccine sourcing, as a higher vaccination rate will
help protect the recovery.
6. Inflation decelerated, from an average 22.1 percent in 2021 to 9.7 percent in June 2022, reflecting the
continued appreciation of the Kwacha with increased supply of foreign exchange, and dissipation of
base effects in prices of some food products alongside seasonal increases in the supply of vegetables.
This helped to counter the upward adjustment in fuel pump prices in December 2021. The latest
Monetary Policy Statement projects inflation averaging 11.4 percent and 8.4 percent in 2022 and 2023
respectively. Inflation is expected to reach the Bank of Zambia target range of 6 - 8 percent by the first
quarter of 2024.
7. The growth in exports that is boosting current account surpluses is being offset by large external
financing needs, including for debt service, resulting in a balance of payments deficit. Foreign
exchange reserves, however, have improved, increasing from 1.9 months of prospective import cover
in 2020 to 3.2 months cover in 2021, reflecting various measures by the Bank of Zambia including
building trust, alongside the general SDR allocation in August 2021, and some disbursement from the
World Bank. Reserves have continued to grow in 2022 and are projected to reach 5.5 months of
(prospective) import cover by 2025.
8. The outlook remains subject to downside risks, including from the pandemic and droughts that impact
agricultural output and food prices as well as electricity supply. A prolonged Russia-Ukraine war with
persistently elevated food and energy prices, alongside tightening global financial conditions and
slowing global growth, as well as spillovers from pandemic-linked supply chain disruptions, are all
potential concerns. These risks could exacerbate imbalances while deepening economic scarring and
poverty. Delays in debt restructuring are also a risk. These risks highlight the significant importance
of an IMF program for Zambia at this juncture. They should be mitigated via flexibility in program
design alongside the authorities’ strong ownership of and commitment to reforms.
Fiscal Policy and Debt Management
9. The main fiscal policy objective is to improve the primary balance. The authorities’ medium-term
Budget Plan (2023-25) and the 2023 Annual Budget reflects their commitment to appropriate revenue,
expenditure, and contingency measures needed to support fiscal and debt sustainability and secure the
primary balance goal. The Budget Plan (2023-25) aims to achieve a primary balance surplus of 3.2
percent of GDP by 2024 (commitment basis) starting from the 6.0 percent of GDP deficit in 2021.
This will be supported by more effective revenue mobilization, rationalizing expenditures and
restructuring debt.
 3

10. Deep and comprehensive debt treatment under the G20 Common Framework will be an essential
complement to fiscal restraint, and in this regard, we are hopeful that G20 creditors can provide
substantive debt relief and so motivate other creditors to do likewise. Our authorities greatly appreciate
the July decision by the official creditor committee and those financing assurances already provided
by members of the committee. The Zambian authorities are now seeking debt treatment from private
creditors and other official bilateral creditors on terms at least as favorable as those being considered
by the creditor committee, and we urge the Fund to back the authorities’ efforts to engage private
creditors (including bondholders) and other official bilateral creditors in timely and effectual
negotiations of these critical debt treatments. We also join the creditor committee in encouraging
multilateral development banks to maximize their support for Zambia to help it meet long-term
financial needs.
11. With prudent debt management a top priority in the authorities’ reform agenda, halting non-
concessional borrowing, cancelling and rescoping some externally financed projects, and working to
gradually eliminate arrears to contractors, while advancing debt restructuring under the G20 Common
Framework, remain key for them. They will also continue to cancel any contracted but undisbursed
commercial loans. On the domestic front, the authorities intend to strengthen local currency financing
through increased issuance of longer-term instruments and broadening of the investor base. This will
help to reduce currency and refinancing risk.
12. Our authorities are committed to enhancing debt management and transparency. They are advancing
work to strengthen debt governance with a medium-term debt management strategy and annual
borrowing plan. This includes a new public debt management bill (the Loans and Guarantees, Grants
Authorization Bill). Amendments in the new bill will enable the parliamentary oversight of loan
contracts and align the public debt definition, and reporting, with international best practice. Work on
public debt data validation and reconciliation with creditors is also progressing with further
commitments to regularly publish the information to enhance debt management and transparency.
13. On domestic arrears, the authorities have cleared all outstanding pension arrears and published a
medium-term expenditure and VAT refund arrears clearance strategy, its main elements being
increased budget provision and debt and cheque swaps, alongside refinancing and restructuring of
debt. Furthermore, a Commitment Control Module linking procurement commitments to the budget
was added in the Integrated Financial Management Information System (IFMIS) to halt the
accumulation of new arrears and became operational in July. This complements the commitment to
enforce the provisions of Public Financial Management Act and Public Procurement Act, including
enforcing penalty regimes for noncompliance. Associated Treasury circulars were issued earlier this
year.
14. Revenue generating reforms have begun. Among other things, the authorities eliminated explicit fuel
subsidies at the end of 2021, by restoring cost-plus pricing for petroleum products, while the
restoration of excise taxes on petrol and diesel later this year, will remove the implicit fuel subsidy. In
addition, firming copper prices and improved production are expected to generate additional fiscal
revenues in the short term.
15. The authorities are also merging all tax policy and administration measures into a comprehensive and
holistic strategy and action plan, while the digitalization of government services with interoperability
and system-based controls is expected to improve tax compliance and the management of tax debt and
arrears. Reforms will seek to widen the tax base, revise tax rates and improve revenue administration.
 4

Specific measures will include upward adjustment of excise duties on alcohol and cigarettes,
streamlining tax incentives and subsidies, reinstating VAT and excise duty on petroleum products, and
enhancing collaboration between the Zambian Revenue Authority and local authorities to expand their
local tax base and enable better mobilization of resources. Other measures to strengthen tax
administration will include fast tracking the rolling out of electronic fiscal devices, introducing digital
stamps on excisable products, and matching custom and in-land revenue data.
16. Given poverty levels and the large youth population, protecting the most vulnerable from the adverse
impacts of fiscal adjustment amidst ongoing pandemic and price pressures is essential, and with this
in mind, the authorities intend to scale up social protection programs in 2022 and over the medium
term. Measures include increases in cash transfers and budget provision for health and education
spending. There is also a plan to allocate significant resources to the Constituency Development Fund
that mainly finances community-based projects while enhancing implementation capacity of local
authorities and improving project monitoring and evaluation. Spending on the Farmer Input Support
Program (FISP) will be streamlined with the introduction of a more cost-effective e-Voucher system,
and FISP cost reduction, under a new comprehensive agricultural support programme. Given limited
fiscal space, the authorities will reduce capital spending during the program period while leveraging
the PPP financing model to fill infrastructure gaps. There will be cautious, structured selection of
projects without creating fiscal risks.
Monetary, Exchange Rate, and Financial Sector Policies
17. The monetary policy stance is guided by a forward-looking monetary policy framework with the
policy rate signaling the policy stance. Following significant tightening with interest rate hikes and
some unwinding of pandemic-related support in 2021, the authorities, in their August 2022 monetary
policy statement, decided to hold the monetary policy rate at 9 percent notwithstanding recent declines
in inflation. This suggests a balanced approach, as inflation is still above the target range, and there
remain notable risks to the inflation outlook, while at the same time domestic credit growth has slowed
notably, probably reflecting earlier tightening. Increased agricultural production can also help to
contain food prices. Meanwhile Parliament’s recent enactment of an amendment to the Bank of
Zambia Act to enhance the bank’s operational independence should also support its ability to pursue
price stability. Exchange rate appreciation is also alleviating imported price pressures, with the
exchange rate remaining flexible and interventions limited to smoothing excessive volatility in the
market. Inflation is projected to return to the target range by mid-2023, with continued implementation
of fiscal consolidation measures and structural reforms under the NDP8 and as the ECF program is
rolled out.
18. The central bank will continue to pursue the development of a secondary market for government
securities. Effective implementation of the Bloomberg E-Bond platform for secondary trading is
expected to enhance transparency in pricing and improve secondary market liquidity for participants.
Improvements in price discovery are expected to strengthen the interest rate channel of monetary
policy transmission.
19. The financial system is assessed as sound with ample liquidity and capital buffers, and profitable
operations. Nevertheless, given elevated economic risks, the central bank introduced reform measures
to strengthen its surveillance and supervision of the banking system and has plans to undertake a
review of the banking sector’s health post-COVID. Meanwhile the authorities have been vigilant in
monitoring and lowering non-performing loan rates. The central bank also developed a new Problem
Bank Framework in May 2022. It is also strengthening micro prudential surveillance and regulation
 5

and has developed a micro-prudential stress testing framework. A deposit protection scheme is also
being established this year as part of the safety net arrangement.

Structural Reforms
20. The authorities’ structural reform agenda aims to achieve a conducive environment for strong and
inclusive growth. Reforms seek to enhance transparency and accountability and good governance, and
improve access to finance and the business climate, while supporting job-intensive productive sectors
such as agriculture and manufacturing. Amendment of the Public Private Partnership (PPP) Act will
also help to manage fiscal risks arising from weaknesses in the current PPP financing framework.
21. Cognizant of the importance of stemming corruption and governance vulnerabilities, the authorities’
reforms aim to strengthen fiscal controls, transparency and PFM. At the same time, the new
administration has tried to enforce a zero tolerance for corruption policy, with disciplinary action taken
in 2021 against Ministry of Health officials involved in misappropriation of resources. Looking ahead,
a comprehensive governance diagnostic assessment, was launched with the help of IMF technical
assistance and the outcome will identify governance vulnerabilities and help in the design of
appropriate corrective measures. The authorities are also addressing deficiencies identified in the
AML/CFT Mutual Evaluation Report.
22. In the financial sector, the authorities are committed to enhancing financial inclusion. Accordingly,
legislation is being revised to encourage the provision of digital financial services, while also
digitalizing government services, and implementing the national Financial Switch to promote
interoperability.
23. Energy sector reforms are a priority with a view to removing inefficiencies in the supply chain and
mitigating fiscal risks from the electricity SOE, ZESCO. The authorities are implementing a five-year
turnaround strategy for ZESCO (2021-25) that focuses on debt restructuring, optimization of capital
expenditure, tariff adjustment and revenue efficiency, and asset optimization. There are also plans to
shift to renewable energy sources such as such as solar and geo-thermal.
24. On sector-specific and investment climate reforms, given the central role of agriculture in food
security, inflation and jobs, and the disruptive impact of climate shocks, the authorities are using
investments in irrigation infrastructure to reduce the sector’s dependency on seasonal rainfall. The
authorities intend to continue investing in expanding access to affordable finance, while also providing
capacity development, and tax incentives. In the manufacturing sector, the authorities will improve
Multi-Facility Economic Zones and industrial parks by rationalizing the number of licenses and
permits required to operate businesses, among other things. The mining tax policy framework will
also be reviewed to encourage investment in the sector.
25. Adaptation needs and resilience building in response to climate change are a growing concern that is
now at the top of the authorities’ agenda, given recent agricultural and electricity generation capacity
impacts and food and energy security considerations in the wake of droughts. The Ministry of Green
Economy and Environment has been established to mainstream climate change adaptation across all
policy; and to program interventions to build resilience, adapt and promote green investment. The
authorities also intend to establish a National Climate Change Fund to lead resource mobilization
efforts for greener economic growth.
 6

Conclusion
26. The Zambian authorities are committed to the implementation of NDP8 reforms, and corresponding
ECF program measures needed to restore macroeconomic stability, entrench debt sustainability, and
support high, inclusive economic growth. They have already undertaken significant reform measures
and completed prior actions agreed with staff, notwithstanding the extremely challenging context.
They value Fund support which they consider critical to the country’s advancement in the current
shock-prone environment, and hope for Executive Directors’ approval of the ECF program, which
should also help to catalyze donor and creditor support.